A newly incorporated subsidiary of a large financial Institution (FI Sub) has an opening balance sheet

comprising assets of $15 million invested in 30-year, 10% semi-annual coupon Treasury bonds selling

at par. The duration of the assets has been calculated as 9.42 years. FI Sub has liabilities of $14

million financed through a two-year, 5.25 % semi-annual coupon note selling at par.

a) Calculate the FI Subs leverage-adjusted duration gap.

b) Calculate the impact on FI Subs equity value if all interest rates were to rise by 20 basis

points.