The Duration Gap | Asset Liability Management

With the earning gap, we saw that changes in interest rates could affect the bank’s profit. But changes in interest rates can also affect the value of the bank’s equity. This is because changes in interest rates: • Affect floating-rate and fixed-rate instruments in different ways, with the value of fixed-rate instruments usually being more sensitive to changes in interest rates • Affect long-term and short-term instruments in different ways, with the value of long-term instruments usually being more sensitive to changes in interest rates A bank can measure the sensitivity of a financial instrument by calculating its duration. The bank can then try to minimize the duration gap, which is the difference between the duration of the bank’s financial assets and the duration of the bank’s financial liabilities. Reducing the duration gap will mitigate the effect of changing interest rates on the value of the bank. — Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world. — SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • A 44-PAGE GUIDE TO U.S. TAXATION • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • MANY MORE FREE PDF GUIDES AND SPREADSHEETS http://eepurl.com/dIaa5z — SUPPORT EDSPIRA ON PATREON *  / prof_mclaughlin   — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST Apple Podcasts: https://podcasts.apple.com/us/podcast... Spotify: https://open.spotify.com/show/4WaNTqV... Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK   / prof_mclaughlin   — ACCESS INDEX OF VIDEOS https://www.edspira.com/index — CONNECT WITH EDSPIRA Facebook:   / edspira   Instagram:   / edspiradotcom   LinkedIn:   / edspira   — CONNECT WITH MICHAEL Twitter:   / prof_mclaughlin   LinkedIn:   / prof-michael-mclaughlin   — ABOUT EDSPIRA AND ITS CREATOR https://www.edspira.com/about/ https://michaelmclaughlin.com