Calculate the leverage-adjusted duration gap of a commercial bank that has assets of $2.4 million invested in 15-year Treasury bonds and whose duration has been estimated at 8.60 years. It has liabilities of $1.5 million financed through a two-year, 6.00 percent annual coupon note selling at par.

4. What is the leverage adjusted duration gap? (Hint: You need to calculate the duration of liabilities first.)

5. What is the impact on equity values if all interest rates increase 50 basis pointsthat is, R/(1 + R) = 0.0050?

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