Question

9. What is the duration of the floating rate mortgages?

a. 0.25 years

b. 10 years

c. 2 years

d. 0.5 years

e. There is not enough information to answer the question.

the right answer is A please show the work

Bank of Baruch ion Assets: 91 day US Treasury bill 2 year commercial loans $150m 75m Liabilities 1 year Certificates of Deposit 5 year Bonds $825n 70n Fixed rate, 9% pa. annually 10 year corporate loans-floating rate Overnight Fed Funds 91-day Commercial Paper Equity 100n 270r 65n LIBOR+50bp, semiannual roll date 505m 10 year floating rate mortgages quarterly roll dates 600m Notes: Commercial paper is a pure discount instrument. The 5 year bonds pay 8.5% p.a. semiannually with a yield of 7.5% pa. and have a duration of 42 years. The 1 year Certificates of Deposit pay 2.75% pa. annually. All values are market values.

Answer 1

d. 0.5 years: For floating rate bond the duration is equal to time to which the interest rate is reset because price becomes equal to par value at every reset