Income Gap Vs Duration Gap

Describe the relationships among a bond s holding period return its duration and the investment horizon.

Income gap vs duration gap. Investment and finance has moved to the new domain. For this reason it fails to recognize basis risk. Compare and contrast the income gap and the duration gap analysis as techniques for the management of interest rate risk by banks. Interest sensitivity gap wikipedia it is a direct and simple method duration is a little more sophisticated.

The duration measures how much an asset or liability changes in price for a certain change in interest rate. Measuring the duration gap is more complex than the simple gap model. The correct answer is a. Duration 8 3 3700 duration 1 1 7 1 4200 3 2 assets variable rate 1900 mortgages fixed rate 1500 mortgages commercial 6500 loans physical capital 2900 liabilities.

Macaulay duration is 8 6 years. The duration gap tells how cash flows for assets and liabilities are matched. Reading 46 los 46k. However duration gap analysis assumes parallel shifts in yield curve.

The duration analysis also recognizes the time value of money. Duration gap macdur investment horizon 8 6 10 1 400. A tool that measures the mismatch between a firm s assets and liabilities it is a measure of the sensitivity of the value of the balance sheet to changes in market interest rates. Since economic value is the difference between asset value and liability value its sensitivity depends on their differential durations which is the duration gap.

What is the duration gap at the time of purchase. A positive duration gap is when the duration of assets exceeds the duration of liabilities which means greater exposure to rising interest rates. 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. More specifically it is calculated as difference between the weighted duration of assets minus the.

A gap analysis is considered harder to use and less widely implemented than duration analysis but it can. B consider the following balance sheet of fairview bank. The duration gap measures how well matched are the timings of cash inflows from assets and cash outflows from liabilities. Gap measures the difference between the interest income they get and what they pay.

The duration gap is the difference between the duration of assets and liabilities. A compare and contrast income gap and duration gap analysis as techniques for management of interest rate risk by banks. The attraction of duration analysis is that it provides a comprehensive measure of irr for the total portfolio. Another way to define duration gap is.