A bank with a positive duration gap experiencing a rise in interest rates will experience an increase in its net worth.

Question

Quizplus · Accepted Answer

A bank with a positive duration gap means that its liabilities (such as deposits) have a shorter term than its assets (such as loans). When interest rates rise, the cost of funding will increase as deposits will need to be repriced at higher rates. However, the income from loans (which have longer maturities) will not increase at the same pace. This will lead to a reduction in net interest margin and profitability, which will negatively impact net worth.

A Bank with a Positive Duration Gap Experiencing a Rise