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	48.2		Checking and savings	81.6
Auto loans	100.7		Certificates of deposit	102.6
Mortgages	150.3		Long-term financing	94.3
Total Assets	299.2		Total liabilities	278.5
			Owner's equity	20.7
			Total liabilities and equity	299.2

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

2.2

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

2.1

years, and the long-term financing has a

10.7-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

$150.3

million to

$100.2

million, and increasing cash reserves to

$98.3

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. (Assume interest rates are APRs based on monthly compounding.)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?

Question content area bottom

Part 1

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

The duration of the assets is

enter your response here

years. (Round to two decimal places.)

Part 2

The duration of the liabilities is

enter your response here

years. (Round to two decimal places.)

Part 3

The duration of the equity is

enter your response here

years. (Round to two decimal places.)

Part 4

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

$150.3

million to

$100.2

million, and increasing cash reserves to

$98.3

million. What is the duration of Acorn's equity now?The duration of the assets is

enter your response here

years. (Round to two decimal places.)

Part 5

The duration of the equity is

enter your response here

years. (Round to two decimal places.)

Part 6

If interest rates are currently

4%

and were to fall to

3%,

estimate the approximate change in the value of Acorn's equity. (Assume interest rates are APRs based on monthly compounding.)We would expect the value of Acorn's equity to

rise

drop

by approximately

enter your response here%.

(Round to two decimal places.)

Part 7

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?(Select from the drop-down menu.)They should

sell

buy

$enter your response here

million worth of

10-year

STRIPS.(Round to two decimal places.)