Answer B.

(20 Points) Blackburn Bank has invested in assets of $1 million a 30-year, 3.12 percent semiannual coupon Treasury bond selling at par. The assets are financed with equity and a $900,000, two-year, 2.20 percent semiannual coupon capital note selling at par. a. What is the duration of this Treasury Bond (please attach an Excel spreadsheet for your calculation of duration). b. What is the duration of the capital note? Semiannual payments Two-year Capital Note (values in thousands of $s) Par value = $900,000 Coupon rate=2.20% R=2.20% Maturity = 2 years t CE DE CE DE CE X DE xt 0.5 $9,900 1 9 ,900 1.5 9,900 2 909,900 Duration = $ ($900,000 = years c. What is the leverage adjusted duration gap of Blackburn Bank? The leverage- adjusted duration gap can be found as follows: Leverage-adjusted duration gap- [DA-D k]-DA-D ($900,000/S1,000,000) d. What is the impact on equity value if the relative change in all market interest rates is a increase of 50 basis points? Note: The relative change in interest rates is AR/(1+R/2) = 0,0050. The change in net worth using leverage adjusted duration gap is given by: AE--(DA-D. k] A (AR/(1+R/2) What would the duration of the assets need to be to immunize the equity from changes in market interest rates? Hint: Immunizing the equity from changes in interest rates requires that the DGAP be 0. Thus, AE-0--D-D k]-0 = DADk, or DA- (20 Points) Blackburn Bank has invested in assets of $1 million a 30-year, 3.12 percent semiannual coupon Treasury bond selling at par. The assets are financed with equity and a $900,000, two-year, 2.20 percent semiannual coupon capital note selling at par. a. What is the duration of this Treasury Bond (please attach an Excel spreadsheet for your calculation of duration). b. What is the duration of the capital note? Semiannual payments Two-year Capital Note (values in thousands of $s) Par value = $900,000 Coupon rate=2.20% R=2.20% Maturity = 2 years t CE DE CE DE CE X DE xt 0.5 $9,900 1 9 ,900 1.5 9,900 2 909,900 Duration = $ ($900,000 = years c. What is the leverage adjusted duration gap of Blackburn Bank? The leverage- adjusted duration gap can be found as follows: Leverage-adjusted duration gap- [DA-D k]-DA-D ($900,000/S1,000,000) d. What is the impact on equity value if the relative change in all market interest rates is a increase of 50 basis points? Note: The relative change in interest rates is AR/(1+R/2) = 0,0050. The change in net worth using leverage adjusted duration gap is given by: AE--(DA-D. k] A (AR/(1+R/2) What would the duration of the assets need to be to immunize the equity from changes in market interest rates? Hint: Immunizing the equity from changes in interest rates requires that the DGAP be 0. Thus, AE-0--D-D k]-0 = DADk, or DA