If D_A kD_L,then falling interest rates will cause the market value of equity to rise.

Question

If D_A > kD_L,then falling interest rates will cause the market value of equity to rise.

Quizplus · Accepted Answer

The numerator, D_A, represents the duration of assets while the denominator, kD_L, represents the duration of liabilities. If the duration of assets is greater than the duration of liabilities, falling interest rates will cause the market value of equity to rise. This is because the value of assets will increase more than the value of liabilities, resulting in a positive impact on equity value.

If DA > KDL,then Falling Interest Rates Will Cause the Market

If D_A > KD_L,then Falling Interest Rates Will Cause the Market