If the duration gap is positive, then increases in interest rates will have a(an) _________ effect on the value of bank equity.
A) favorable
B) unfavorable
C) irrelevant
D) immunized

Question

Quizplus · Accepted Answer

A positive duration gap means that the duration of assets is longer than the duration of liabilities. When interest rates increase, the value of assets (which are more sensitive to interest rate changes due to their longer duration) will decrease more than the value of liabilities, leading to a decrease in the value of bank equity. This is considered unfavorable.

If the Duration Gap Is Positive, Then Increases in Interest