As a newly hired CEO of the People Trust Co., the first you do is to study the firm’s balance sheet. You find that your firm has $100 million in three-year loans (total assets), $70 million in one-year deposits (total liabilities) and $30 million in equity. You feel that the interest rate risk of equity holders is too high and decide to issue a $20 million long-term subordinated bond and repurchase $20 million equity. Which choice of bonds would eliminate interest-rate risk of equity holders?
A) A bond with a duration of 1
B) A bond with a duration of 3
C) A bond with a duration of 7.67
D) A bond with a duration of 11.5