A bank that has made 30 year adjustable rate mortgages that reprice in 6 months that are funded with one year CDs will have a positive $GAP over a 1 year period and a negative Duration Gap all else equal.

Question

Quizplus · Accepted Answer

A positive $GAP occurs when rate-sensitive assets exceed rate-sensitive liabilities over a given period. Since the mortgages reprice in 6 months and CDs in 1 year, the bank has more rate-sensitive assets than liabilities within 1 year. A negative Duration Gap indicates that the duration of liabilities is longer than the duration of assets, which is consistent with the scenario where assets reprice sooner than liabilities.

A Bank That Has Made 30 Year Adjustable Rate Mortgages