Consider an asset with a current market value of $250 000 and a duration of 3.3 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $225 000 and has a maturity of 4 years. The current discount rate is 15 per cent. Calculate the duration gap for this scenario:
A) -0.3 years
B) 0.3 years
C) -0.7 years
D) 0.7 years

Question

Quizplus · Accepted Answer

Duration gap is the difference between the duration of assets and liabilities.

Duration of assets = 3.3 years
Duration of liabilities = 4 years

Duration gap = Duration of assets - Duration of liabilities
              = 3.3 - 4
              = -0.7 years

However, since duration gap is a measure of interest rate risk, a negative duration gap indicates that the market value of the firm's net worth will increase if interest rates increase. Therefore, the firm can be considered to be in a favorable interest rate position.

Hence, the answer is A) -0.3 years.

Consider an Asset with a Current Market Value of $250