# Duration

Can someone explain why you have \$100M in denominator, and not \$125M? This is question 14 on page 151in CFAI. " if we use funds from a \$25 million overnight repo agreement to purchase bonds in addition to the current \$100 million portfolio, the levered portfolio’s change in value for a 1% change in interest rates would equal \$5,125,000 while giving you the portfolio duration you require."

Since the 100 MM represents the equity in your portfolio…

The question asks for the duration of the portfolio, so the denominator is 100m. This is a typical CFAI question, it actually gives you the leveraged portfolio’s change in value for 1% rate change, and the amount of equity. It seems tht it assumes the duration of liabilities (repo agreement) is 0. Please confirm…

If repo is overnight the duration = 0 if 2-year repo, the duration is = 2

Thanks! Since the question asks “duration of the portfolio”, shouldn’t it be \$125M since the portfolio is now \$125M including the leverage of \$25M? The question asks Duration of total portfolio, not just the equity portion of the portfolio. Also, is it really true that if the repo is 2-year then the Duration is 2? I read every word on this topic in CFAI curriculum but still haven’t found satisfactory explanation.

The answer for this question is calculating the “Duration of EQUITY” as defined on page 109. But the question is asking for “the duration of sample leveraged portfolio”, which shall be a different thing according to CFAI book as follows. Can someone help on this problem? ======================= The following is from (V4 p. 109). With DA denoting the duration of the assets (the bond portfolio) and DL the duration of the liabilities (borrowings), the duration of EQUITY, DE, is given by DE =(DA*A-DL*L)/E

No one else have problem with EOC Q14 on P151?

deriv, do you have a job? I always see you on here.

wake2000 Wrote: ------------------------------------------------------- > deriv, do you have a job? I always see you on > here. He’s in Asia, it’s 3am there.

yes, I have… AF is one of a few sites unblocked. But I always see you here, too.