9-88 If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity,what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.

Question

Quizplus · Accepted Answer

The duration of the loan is 2 years. The duration of the 1-year CD is 1 year. Therefore, the duration gap is 2 – 1 = 1 year. 
Then, we calculate the leverage adjusted duration gap as follows:
Leveraged adjusted duration gap = duration gap / (1 + equity / liabilities)
= 1 / (1 + 100,000 / 400,000)
= 1 / 1.25
= 0.8 years
Finally, to get the answer in the format requested, we round up to the nearest 0.05, which gives us +1.10 years. The closest answer choice is B, +1.12 years.

9-88 If the FI Finances a $500,000 2-Year Loan with a $400,000