In order to achieve a negative leverage adjusted duration gap (DA-kDL<0) , a financial institution with zero leverage adjusted duration gap can decrease the duration of asset portfolio byGroup of answer choicesIssuing short term bonds, use the funds to buy long term assetsSelling long term bonds in the asset portfolio, replace them with short term bondsSelling short term bonds in the asset portfolio, replace them with long term bondsIssuing short term bonds, use the funds to buyback its long term bonds
Question
In order to achieve a negative leverage adjusted duration gap (DA-kDL<0) , a financial institution with zero leverage adjusted duration gap can decrease the duration of asset portfolio byGroup of answer choicesIssuing short term bonds, use the funds to buy long term assetsSelling long term bonds in the asset portfolio, replace them with short term bondsSelling short term bonds in the asset portfolio, replace them with long term bondsIssuing short term bonds, use the funds to buyback its long term bonds
Solution 1
A negative leverage adjusted duration gap (DA-kDL<0) means that the duration of assets is less than the duration of liabilities. This can be achieved by decreasing the duration of the asset portfolio.
One way to decrease the duration of the asset portfolio is to sell long-term bonds (which have a higher duration) and replace them with short-term bonds (which have a lower duration). This will decrease the average duration of the assets, leading to a negative duration gap.
So, the correct answer is:
"Selling long term bonds in the asset portfolio, replace them with short term bonds"
Solution 2
A negative leverage adjusted duration gap (DA-kDL<0) means that the duration of assets is less than the duration of liabilities. This can be achieved by decreasing the duration of the asset portfolio.
One way to decrease the duration of the asset portfolio is to sell long-term bonds (which have a higher duration) and replace them with short-term bonds (which have a lower duration). This will decrease the average duration of the assets, leading to a negative duration gap.
So, the correct answer is:
"Selling long term bonds in the asset portfolio, replace them with short term bonds"
Solution 3
A negative leverage adjusted duration gap (DA-kDL<0) means that the duration of assets is less than the duration of liabilities. This can be achieved by decreasing the duration of the asset portfolio.
One way to decrease the duration of the asset portfolio is to sell long-term bonds (which have a higher duration) and replace them with short-term bonds (which have a lower duration). This will decrease the average duration of the assets, leading to a negative duration gap.
So, the correct answer is:
"Selling long term bonds in the asset portfolio, replace them with short term bonds"
Similar Questions
An FI has financial assets of $800 and equity of $50. If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap? A.0.8844 years.B.Cannot be determined.C.0.9000 years.D.0.9756 years.E.0.9600 years.
Which of the following statements is FALSE?A.For a given maturity fixed-income asset, duration decreases as the market yield increases. B.Duration of a zero coupon bond is equal to the bond's maturity. C.Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence. D.The economic meaning of duration is the interest elasticity of a financial asset’s price. E.Duration increases with the maturity of a fixed-income asset at a decreasing rate.
Which of the following statements is FALSE?A.The economic meaning of duration is the interest elasticity of a financial asset’s price. B.Duration of a zero coupon bond is equal to the bond's maturity. C.Duration increases with the maturity of a fixed-income asset at a decreasing rate. D.Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence. E.For a given maturity fixed-income asset, duration decreases as the market yield increases.
Portfolio duration most accurately approximates the sensitivity of the value of a bond portfolio to …Select one:a.Both increases and decreases in the slope of the yield curve.b.Parallel shifts in the yield curve.c.Decreases in the slope of the yield curve.d.Increases in the slope of the yield curve.
Which of the following statements is TRUE?A.Duration is the weighted-average time to maturity on the loan using the present values of the cash flows as weights.B.An FI can immunize its portfolio by matching the maturity of its asset with its liabilities. C.The smaller the leverage-adjusted duration gap, the more exposed the FI is to interest rate shocks. D.The larger the numerical value of duration, the more sensitive is the price of that asset or liability to changes or shocks in interest rates.E.Setting the duration of the assets higher than the duration of the liabilities will exactly immunize the net worth of an FI from interest rate shocks.
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