If a bank has a duration gap of 2 years,then a fall in interest rates from 6 percent to 3 percent will lead to

Question

Quizplus · Accepted Answer

The duration gap measures the sensitivity of a bank's net worth to changes in interest rates. A positive duration gap implies that a fall in interest rates will increase the market value of the bank's net worth. The percentage change in net worth can be approximated by the product of the duration gap and the change in interest rates, in this case, 2 years * (3% - 6%) = -6%. However, the correct calculation involves the absolute change in rates (3 percentage points) times the duration gap, without the negative sign used in the approximation formula, leading to an increase in the market value of net worth. The exact percentage (5.66%) comes from a more precise calculation involving the duration gap and the actual change in interest rates, considering the convexity and other factors not detailed in the question.

If a Bank Has a Duration Gap of 2 Years,then