In Reading 22, EOC #13, the answer key says a leveraged portfolio would have “a longer duration if the overnight repo is used instead of the 2-year term repo”. Intuitively, I would think it is the other way around. How would the longer term duration shorten the total duration fo the portfolio here?
do the math and see
you are borrowing something short term …
-DL (Duration of Liability) * Amount Borrowed is removed …
A smaller # is removed - so the net effect is going to be a larger # overall?
Ah, okay, that makes sense. I was thinking in the context of lending/long bond positions. Thanks!