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Asset&Liability Management. The Concept of Duration and Managing A Bank’s Duration Gap. 7-2. The Concept of Duration. Duration is the weighted average maturity of a promised stream of future cash flows. 7-3. To Calculate Duration. 7-4. Price Sensitivity of a Security. 7-5.

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asset liability management

Asset&Liability Management

The Concept of Duration and

Managing A Bank’s Duration Gap

the concept of duration

7-2

The Concept of Duration

Duration is the weighted average maturity of a promised stream of future cash flows.

duration of an asset portfolio

7-5

Duration of an Asset Portfolio

Where:

wi = the dollar amount of the ith asset divided by total assets

Dai = the duration of the ith asset in the portfolio

duration of a liability portfolio

7-6

Duration of a Liability Portfolio

Where:

wi = the dollar amount of the ith liability divided by total liabilities

Dli = the duration of the ith liability in the portfolio

limitations of duration gap management

7-10

Limitations ofDuration Gap Management
  • Finding Assets and Liabilities of the Same Duration Can be Difficult
  • Some Assets and Liabilities May Have Patterns of CFs Not Well Defined
  • Customer Prepayments May Distort the Expected Cash Flows in Duration
  • Not a Linear Relationship Between Prices and Interest Rates