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Asset&Liability Management. The Concept of Duration and Managing A Bank’s Duration Gap. 7-2. The Concept of Duration. Duration is the weighted average maturity of a promised stream of future cash flows. 7-3. To Calculate Duration. 7-4. Price Sensitivity of a Security. 7-5.
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Asset&Liability Management The Concept of Duration and Managing A Bank’s Duration Gap
7-2 The Concept of Duration Duration is the weighted average maturity of a promised stream of future cash flows.
7-3 To Calculate Duration
7-4 Price Sensitivity of a Security
7-5 Duration of an Asset Portfolio Where: wi = the dollar amount of the ith asset divided by total assets Dai = the duration of the ith asset in the portfolio
7-6 Duration of a Liability Portfolio Where: wi = the dollar amount of the ith liability divided by total liabilities Dli = the duration of the ith liability in the portfolio
7-7 Duration Gap
7-8 Change in the Value of a Bank’s Net Worth
7-9 Impact of Changing Interest Rates on Bank’s Net Worth
7-10 Limitations ofDuration Gap Management • Finding Assets and Liabilities of the Same Duration Can be Difficult • Some Assets and Liabilities May Have Patterns of CFs Not Well Defined • Customer Prepayments May Distort the Expected Cash Flows in Duration • Not a Linear Relationship Between Prices and Interest Rates