A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has:

Question

Quizplus · Accepted Answer

The duration gap is calculated as the weighted average duration of assets minus the weighted average duration of liabilities. Here, it's (1.15 * $250 million / $250 million) - (2.70 * $225 million / $225 million) = 1.15 - 2.70 = -1.55. However, the correct calculation for the gap in terms of years should consider the proportion of assets and liabilities to the total assets, leading to a different calculation than the options provided. The mistake in my explanation is assuming direct subtraction without considering the correct formula for duration gap which involves weights based on the total assets. The correct approach involves calculating the weighted average of both assets and liabilities, then subtracting the liabilities' duration from the assets' duration, considering the total assets and liabilities. Given the options, none directly match the correct calculation, but option D suggests a negative duration gap, which aligns with the concept that liabilities have a longer duration than assets, but the exact value provided in the options does not match the standard calculation method.

A Bank Has an Average Asset Duration of 1