One way that banks can reduce the duration of their asset portfolios is through the use of

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Banks can reduce the duration of their asset portfolios by using adjustable rate mortgages. Unlike fixed rate mortgages, the interest rate on adjustable rate mortgages changes periodically according to a benchmark rate, such as the prime rate, LIBOR, or T-bills. As the benchmark rate increases, so does the interest rate on the mortgage. As a result, the cash flows generated by the mortgage are more closely matched with the cash flows that the bank owes to its depositors or other creditors. This reduces the interest rate risk and increases the liquidity of the bank's balance sheet. Certificates of deposit and short-term borrowing are sources of funds for banks, not ways to manage their asset portfolios.

One Way That Banks Can Reduce the Duration of Their