The Citrix Fund has invested in a portfolio of government bonds that has a current market value of $45.7 million. The duration of this portfolio of bonds is

13.9 years. The fund has borrowed to purchase these bonds, and the current value of its liabilities (i.e., the current value of the bonds it has issued) is

$39.9 million. The duration of these liabilities is 3.8 years. The equity in the Citrix Fund (or its net worth) is obviously $5.8 million. The market-value balance sheet below summarizes this information:

Assets

Liabilities (Debt) and Equity

Portfolio of Goverment

Short- and Long-Term

Bonds (duration=13.9) $45,700,000

Debt (duration=3.8) $39,900,000

Equity $5,800,000

Total $45,700,000

both sides total 45700000 assets and liabilities

Assume that the current yield curve is flat at

5.4%.

You have been hired by the board of directors to evaluate the risk of this fund.

a. Consider the effect of a surprise increase in interest rates, such that the yields rise by 50

basis points (i.e., the yield curve is now flat at 5.9%).

What would happen to the value of the assets in the Citrix Fund? What would happen to the value of the liabilities? What can you conclude about the change in the value of the equity under these conditions?