First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent.
-What is the impact on the dealer's market value of equity per $100 of assets if the change in all interest rates is an increase of 0.5 percent [i.e., ΔR = 0.5 percent]
A)+$336,111.
B)-$0.605.
C)-$336,111.
D)+$0.605.
E)-$363,000.

Question

Quizplus · Accepted Answer

The impact on market value of equity can be calculated using the following formula:

ΔMarket Value of Equity = (Leverage-adjusted duration gap) x (Change in interest rates) x (Total assets) x (Equity/assets ratio)

Plugging in the given values:

ΔMarket Value of Equity = (1.21) x (0.005) x ($60,000,000) x (0.07) 
ΔMarket Value of Equity = -$336,111

Note that the negative sign indicates a decrease in market value of equity. Therefore, the correct answer is C.

First Duration, a Securities Dealer, Has a Leverage-Adjusted Duration Gap