The Century 22 Fund Has Invested in a Portfolio of Mortgage-Backed

question 7

Essay

The Century 22 fund has invested in a portfolio of mortgage-backed securities that has a current market value of $245 million.The duration of this portfolio of mortgage-backed securities is 14.7 years.The fund has borrowed to purchase these securities,and the current value of its liabilities (i.e. ,the current value of the bonds Century 22 has issued)is $160 million.The duration of these liabilities is 5.4 years.What is the initial duration of the equity for the Century 22 fund?

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Definitions:

Sacrifice Ratio

A measure of the economic cost associated with reducing inflation, often calculated as the percentage loss in output per percentage point decrease in inflation.

Inflation Expectations

The anticipation by consumers and businesses of the rate at which prices will rise in the future.

Phillips Curve

An economic theory suggesting an inverse relationship between the rate of inflation and the rate of unemployment within an economy.

Money Supply

Money supply is the total amount of monetary assets available in an economy at a specific time.