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

Question

Quizplus · Accepted Answer

When interest rates rise, the value of long-term bonds falls, which reduces the value of the bank's liabilities. Since the bank has a negative duration gap, its assets are more sensitive to interest rate changes than its liabilities, so the overall effect is an increase in net worth.

A Bank with a Negative Duration Gap Experiencing a Rise