Financial Institution XY has assets of $5 millions invested in a 5-year. The assets are financed with equity and a $4.900.000, 5-year, 3 percent semiannual coupon capital note selling at par.

a.What is the leverage-adjusted duration gap of the FI?

b.What is the impact on equity value if the relative change in all market interest rates is a decrease of 15 basis points?

c.Using the information calculated in parts (a) and (b), infer a general statement about the desired duration gap for an FI if interest rates are expected to increase or decrease and verify your inference if there is a relative change in all market interest rates of 25 basis points.

d.What would the duration of the assets need to be to immunize the equity from changes in market interest rates?