You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn's balance sheet is as follows (in millions of dollars):

Assets			Liabilities
Cash reserves	51.8		Checking and savings	78.2
Auto loans	98.6		Certificates of deposit	102.7
Mortgages	149.5		Long-term financing	98.4
Total Assets	299.9		Total liabilities	279.3
			Owner's equity	20.6
			Total liabilities and equity	299.9

When you analyze the duration of loans, you find that the duration of the auto loans is

2.1

years, while the mortgages have a duration of

7.2

years. Both the cash reserves and the checking and savings accounts have a zero duration. The CDs have a duration of

1.8

years, and the long-term financing has a

10.5-year

duration.

a. What is the duration of Acorn's equity?

b. Suppose Acorn experiences a rash of mortgage prepayments, reducing the size of the mortgage portfolio from

$149.5

million to

$99.7

million, and increasing cash reserves to

$101.6

million. What is the duration of Acorn's equity now? If interest rates are currently

4%

and were to fall to

3%,

estimate the approximate change in the value of Acorn's equity.c. Suppose that after the prepayments in part

(b),

but before a change in interest rates, Acorn considers managing its risk by selling mortgages and/or buying

10-year

Treasury STRIPS (zero coupon bonds). How many should the firm buy or sell to eliminate its current interest rate risk?