Duration Gap

Duration gap measures the sensitivity of a bond or a portfolio's value to interest rate changes. It compares the average time it takes for cash flows from assets and liabilities to be received or paid. A positive duration gap means assets are more sensitive to rate increases than liabilities, risking a decrease in value if rates rise. Conversely, a negative gap indicates liabilities are more sensitive, exposing the entity to potential losses if rates fall. Managing this gap helps financial institutions and investors balance risks associated with fluctuating interest rates, ensuring more predictable asset and liability values over time.