Can someone please explain why using the duration of an overnight repo vs. A 2 year repo increases the levered portfolio duration more? Thanks.
the repo is a liability. the shorter the duration of the liability the less you subtract from the numerator in the leveraged duration formula. assets (dur) - liab (dur) / equity = leveraged duration
I’m a bit confused. I was always under the impression that the duration of assets = duration of the leveraged portfolio Not that the duration of equity = duration of levered portfolio Can you please confirm? Thanks
Yea…this messes me up too. my statement is based on page 109, under the duration of equity forumla. The calc comes up with a duration of EQUITY for the bond portfolio of 11.5. Then it says “Duration at 11.5 is almost 3 times the duration of the unlevered bond portfolio”, so it sounds like they are calling the 11.5 the duration of the levered bond portfolio. I think to bottom line is that borrowing funds with a duration of 0 (or some other low number), and then buying assets with a meaningfully higher duration will increase overall portfolio duration.
Thanks for the help it makes sense now. Goodluck