The numbers provided are in millions of dollars and reflect market values:
-What is the leverage-adjusted duration gap of the FI?
A)3.61 years.
B)3.74 years.
C)4.01 years.
D)4.26 years.

Question

The numbers provided are in millions of dollars and reflect market values: 
-What is the leverage-adjusted duration gap of the FI?
A)3.61 years. 
B)3.74 years. 
C)4.01 years. 
D)4.26 years.

Quizplus · Accepted Answer

11efb87d_9588_11e2_9137_75d247c7b418_TB1314_00 We can use the formula:
Leverage-adjusted duration gap = Duration gap / (1 + (Leverage ratio x Duration of assets))

Duration gap = (0.70 x 6) - (0.50 x 4) = 2.2 years

Duration of assets = (0.70 x 8) + (0.30 x 5) = 6.7 years

Leverage ratio = Total assets / Equity = (0.70 x 8) + (0.30 x 5) / 2 = 2.6

Therefore, leverage-adjusted duration gap = 2.2 / (1 + (2.6 x 6.7)) = 3.74 years

The best choice is B (3.74 years).

The Numbers Provided Are in Millions of Dollars and Reflect