Question

what is duration gap and why in this case would a negative duration gap mean theres a greater risk of low interest rates?

4) Cancuare the duranon gap at the time of purchase Chint : an Invener plans to venre in 10 years. So, this Invator's Investment hurton is 10 years.) Duvarın gap = Marowley duarin Cinemunt heriton 8.1390 (10) yeah -1,8610 - at time of Puchare , the duration gap is regule fu This hand 5) Dols this bond at Purchase enrail the risk of higher or lower Interest rares? Since low the dusunin gapis nugarice, There's a list of inrerit runts.

Answer 1

Duration gap is nothing but the difference in the time when cash would come in from assets and cash would go out while repaying the liabilities. There has to be a match between the two. In case cash inflows are expected to be higher as comapred to outflow from liablilities, then duration gap is said to be positive whereas in outflows are higher, then duration gap is negative.

In this case , duration gap is coming out to be negative, it means outflows through liabilities are higher than inflows. In order to increase income, and to price the liabilities at a lower interest rate, the interest rates tend to be lower.

The case is vice versa in case of a positive duration gap.