Duration gap is used by banks to:
a. measure the credit risk.
b. measure the technology risk.
c. measure their risk due to changes in the inflation.
d. measure their risk due to changes in the interest rates.
e. measure their risk due to changes in the inflation.
The duration is the change in the value of an asset with respect to change in the interest rates. More specifically, the duration is the percentage change in the price of the financial asset for a unit percentage change in the interest rates.
Answer and Explanation:
Banks use the duration gap to d measure their risk due to changes in the interest rates.
Banks have assets (loans) and liabilities (deposits), which...
See full answer below.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
fromChapter 3 / Lesson 6
Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.