Problem
I. Calculate the leverage-adjusted duration gap of an FI that has assets of $2.6 million invested in 25-year, 11 percent semiannual coupon Treasury bonds selling at par and whose duration has been estimated at 10.10 years. It has liabilities of $1,060,000 financed through a two-year, 7.25 percent semiannual coupon note selling at par.
II. What is the impact on equity values if all interest rates fall 10 basis points-that is, ΔR/(1 + R/2) = -0.0010?