Transcription of appendix 1 to c9hapter Duration Gap Analysis - Pearson
{{id}} {{{paragraph}}}
Example: marketing
appendix 1 to c9hapter Duration Gap Analysis - Pearson
32An alternative method for measuring interest-rate risk, called Duration gap Analysis ,examines the sensitivity of the market value of the financial institution s net worth tochanges in interest rates. Duration Analysis is based on Macaulay s concept of Duration ,which measures the average lifetime of a security s stream of payments (described inthe appendix to Chapter 4). Recall that Duration is a useful concept, because it pro-vides a good approximation, particularly when interest-rate changes are small, of thesensitivity of a security s market value to a change in its interest rate using the fol-lowing formula:(1)where% P (Pt 1 Pt)/Pt percent change in market value of the securityDUR durationi interest rateAfter having determined the Duration of all assets and liabilities on the bank s bal-ance sheet, the bank manager could use this formula to calculate how the marketvalue of each asset and liability changes when there is a change in interest rates andthen calculate the effect on net worth.
EXAMPLE 1: Duration Gap Analysis The bank manager wants to know what happens when interest rates rise from 10% to 11%. The total asset value is $100 million, and the total liability value is $95 million.
Loading..
Tags:
Information
Domain:
Source:
Link to this page:
Please notify us if you found a problem with this document:
Related search queries
Gap Analysis, GAUTENG, Analysis, Setting Maintenance Priorities through a Gap Analysis, And Action Plan Recommendations Relative to, Seafood traceability systems: gap analysis, Seafood traceability systems: gap analysis of inconsistencies in standards, Gap Analysis Checklist, Way to Improve Ergonomic and Safety, Gap Analysis Part A: Filling in