This problem says: funds from borrowing =25M current portfolio = 100M Levered portfolio’s change in value for a 1% change in interest rates = $5,125,000 What is the duration of the sample leveraged portfolio? I thought you’d use DD = ED * (.01) * Vp and solve for VP They do something similar,but do (5,125,000 / 100M) * 100 Why do they multiply by 100?
they rearranged the DD formula/ DD= Duration x PV x .01 They gave you the DD in this example so plug and chug 5,125,000= Duration X 100M x .01 Duration= 51215000/ 100M x .01 5.125
what io dont get is why they do not add the 25M to the 100M. it sounds like they increase the total to 125M… it says if we use 25 M to purchase bonds IN ADDITION to the current 100M. why does this not make the Portfolio Value 125m?
SkipE99 Wrote: ------------------------------------------------------- > what io dont get is why they do not add the 25M to > the 100M. it sounds like they increase the total > to 125M… > > it says if we use 25 M to purchase bonds IN > ADDITION to the current 100M. why does this not > make the Portfolio Value 125m? That is the way I did it. I got it wrong all 3 times I ran through that question :).
yeah and i just loooooove how they give you the 125M wrong answer too! one off- assume this poorly worded question would be thrown out
SkipE99 Wrote: ------------------------------------------------------- > yeah and i just loooooove how they give you the > 125M wrong answer too! > > > one off- assume this poorly worded question would > be thrown out It’s because of the duration of equity. It should be off 100MM. I know why it is 5.1, just did it wrong all 3 times :).
ok so even if you used a repo rate and borrowed 200M in addition to your current portfolio of 100M. the duration of the sample leveraged portfolio would still be based off of equity only? by duration of sampled leveraged portfolio they actually mean the duration of the equity in the portfolio?
SkipE99 Wrote: ------------------------------------------------------- > ok so even if you used a repo rate and borrowed > 200M in addition to your current portfolio of > 100M. the duration of the sample leveraged > portfolio would still be based off of equity > only? > > by duration of sampled leveraged portfolio they > actually mean the duration of the equity in the > portfolio? Yes D(A) - D(L) / E It should definitely be based off equity. Just I can’t comprehend reading well.
yeah but in this question, they do not use that formula unless we are supposed to recognize that Dollar Duration is = DA-DL they also multiply by 100 which is not in your formula… i think i have confused myself. thanks Bradleyz…and sorry to hijack
SkipE99 Wrote: ------------------------------------------------------- > yeah but in this question, they do not use that > formula unless we are supposed to recognize that > Dollar Duration is = DA-DL > > they also multiply by 100 which is not in your > formula… i think i have confused myself. thanks > Bradleyz…and sorry to hijack I think we are supposed to recognize that. The dollar duration is 5,125k based on equity of 100,000k. Confusing question but something that could definitely be asked again. The multiplying by 100 is just to get a whole number measurement for duration. Common industry practice and I believe in the book as well when discussing adding another bond. The dollar duration old, dollar duration new example.
ok thanks!
Thanks everyone!