Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.
-The duration of the T-notes, Baa bonds, and GICs is 1.93 years, 6.9 years, and 4.5 years respectively. What is the leverage-adjusted duration gap for Allright?

Question

Quizplus · Accepted Answer

To find the leverage-adjusted duration gap, we need to calculate the weighted average duration of assets and liabilities and then subtract them.

Weighted average duration of assets = [(50 million/140 million) x 1.93 years] + [(90 million/140 million) x 6.9 years] = 4.45 years

Weighted average duration of liabilities = (100 million/140 million) x 4.5 years = 3.21 years

Leverage-adjusted duration gap = 4.45 years - 3.21 years = 1.24 years

Therefore, the closest choice is D) 1.91 years.

Allright Insurance Has Total Assets of $140 Million Consisting of $50