Sheila Ibahn, a portfolio manager is reviewing the performance of a fixed income portfolio and expects a downward parallel shift in the yield curve. Therefore, she recommends increasing interest rate risk across the portfolio. She says,
“We could lever the portfolio by entering into either an overnight or 2-year term repurchase agreement and use the repo funds to purchase additional bonds that have the same duration as the current portfolio.”
Question 13 asks, "the levered portfolio would have: A) the same duration if either the overnight repo or the 2-year repo is used; 2) a longer duration if the overnight repo is used instead of the 2-year term repo; C) a shorter duration if the overnight repo is used.
The correct answer is B. I’m having trouble wrapping my head around how the repo term in the use of leverage affects portfolio duration. Can anyone clarfiy? Thanks