All else the same, a positive duration gap causes the liquidity of the bank to:
A) increase
B) decrease
C) change only when the level of interest rates is high
D) change only when the level of interest rates is low
E) not change

Question

Quizplus · Accepted Answer

A positive duration gap means that the duration of assets exceeds the duration of liabilities. In a rising interest rate environment, this leads to a decrease in the economic value of equity more so than in a stable or falling interest rate environment, because the value of longer-duration assets falls more than the value of shorter-duration liabilities. This can strain the bank's liquidity as the value of its assets decreases relative to its liabilities.

All Else the Same, a Positive Duration Gap Causes the Liquidity