Consider the following. (LG 23-3)

a. Calculate the leverage-adjusted duration gap of an FI that has assets of $1 million invested in 30-year, 10 percent semiannual coupon Treasury bonds selling at par and whose duration has been estimated at 9.94 years. It has liabilities of $900,000 financed through a two-year, 7.25 percent semiannual coupon note selling at par.

b. What is the impact on equity values if all interest rates fall 20 basis points—that is, ΔR/(1 + R/2) = –0.0020?

AppendixLO1