You report your work as a financial analyst for Tory's Pub and Mortgage Loans (TPML) and you're immediately called to a room behind the bar for a consultation with John, the sole owner of this establishment. John fancies himself to be a savvy investor, but knows only enough mortgage finance to be dangerous to himself and others. After reading the business pages in yesterday's Toronto Sun, John has become concerned with the risk that recent interest volatility poses to the solvency of his operation. The assets in TPML's corporate portfolio consist of ten identical constant payment mortgages. Each mortgage has a twenty year maturity, full amortization, a fixed annual coupon rate of 5.00% over its 20 year maturity and an initial balance of $1 million. John directs you to calculate the change in the value of this portfolio for the respective one percent increases and decreases in the current monthly interest rate of 6%,on the assumption that this one month interest rate remains constant over all 1 month periods in the future. You proceed with this analysis, using the duration procedure, and find the duration of the TPML asset portfolio to be 6.

a) Under John's scenario, what are the respective values of this mortgage portfolio for the specified interest increase and decrease?

b) After reporting the results of your analysis to John, he admits that he financed these ten mortgages by persuading his father-in-law to give a personal loan of $9,600,00. with a maturity of 12 months from today, and he further tells you that the duration of this liability is 0.1. What do you tell him about his equity value in TPML for these same respective interest changes