To install click the Add extension button. That's it.

The source code for the WIKI 2 extension is being checked by specialists of the Mozilla Foundation, Google, and Apple. You could also do it yourself at any point in time.

4,5
Kelly Slayton
Congratulations on this excellent venture… what a great idea!
Alexander Grigorievskiy
I use WIKI 2 every day and almost forgot how the original Wikipedia looks like.
Live Statistics
English Articles
Improved in 24 Hours
Added in 24 Hours
Languages
Recent
Show all languages
What we do. Every page goes through several hundred of perfecting techniques; in live mode. Quite the same Wikipedia. Just better.
.
Leo
Newton
Brights
Milds

# Duration gap

## From Wikipedia, the free encyclopedia

### YouTube Encyclopedic

• 1/3
Views:
11 512
6 529
9 475
• ✪ Managing Interest Rate Risk - Duration Gap Analysis
• ✪ Calculating the Duration of a Bank's Net Worth
• ✪ What is Gap Analysis?

## Definition

The difference between the duration of assets and liabilities held by a financial entity.[1]

## Overview

The duration gap is a financial and accounting term and is typically used by banks, pension funds, or other financial institutions to measure their risk due to changes in the interest rate. This is one of the mismatches that can occur and are known as asset liability mismatches.

Another way to define Duration Gap is: it is the difference in the price sensitivity of interest-yielding assets and the price sensitivity of liabilities (of the organization) to a change in market interest rates (yields).[2]

The duration gap measures how well matched are the timings of cash inflows (from assets) and cash outflows (from liabilities).

When the duration of assets is larger than the duration of liabilities, the duration gap is positive. In this situation, if interest rates rise, assets will lose more value than liabilities, thus reducing the value of the firm's equity. If interest rates fall, assets will gain more value than liabilities, thus increasing the value of the firm's equity.

Conversely, when the duration of assets is less than the duration of liabilities, the duration gap is negative. If interest rates rise, liabilities will lose more value than assets, thus increasing the value of the firm's equity. If interest rates decline, liabilities will gain more value than assets, thus decreasing the value of the firm's equity.

By duration matching, that is creating a zero duration gap, the firm becomes immunized against interest rate risk. Duration has a double-facet view. It can be beneficial or harmful depending on where interest rates are headed.

Some of the limitations of duration gap management include the following:

• the difficulty in finding assets and liabilities of the same duration
• some assets and liabilities may have patterns of cash flows that are not well defined
• customer prepayments may distort the expected cash flows in duration
• customer defaults may distort the expected cash flows in duration
• convexity can cause problems.

${\displaystyle Duration\ gap=duration\ of\ earning\ assets\ -\ duration\ of\ paying\ liabilities\ \times \ {\frac {paying\ liabilities}{earning\ assets}}}$

When the duration gap is zero, the firm is immunized only if the size of the liabilities equals the size of the assets. In this example with a two-year loan of one million and a one-year asset of two millions, the firm is still exposed to rollover risk after one year when the remaining year of the two-year loan has to be financed.

${\displaystyle 0=1-2\times {\frac {1,000,000}{2,000,000}}}$

## References

1. ^ Lee, Cheng-Few; Lee, Alice C. (2006-05-05). Encyclopedia of Finance. Springer. pp. 423–. ISBN 9780387262840. Retrieved 15 February 2013.
2. ^ Skinner, Frank (2004-10-29). Pricing and Hedging Interest and Credit Risk Sensitive Instruments. Butterworth-Heinemann. pp. 218–. ISBN 9780080473956. Retrieved 15 February 2013.
This page was last edited on 7 March 2019, at 15:27
Basis of this page is in Wikipedia. Text is available under the CC BY-SA 3.0 Unported License. Non-text media are available under their specified licenses. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc. WIKI 2 is an independent company and has no affiliation with Wikimedia Foundation.