Duration Gap Analysis

Duration Gap Analysis is a financial tool used to assess the sensitivity of a company’s assets and liabilities to changes in interest rates. It measures the difference in the duration of these cash flows: assets generally produce income, while liabilities require repayment. A positive duration gap indicates that assets are more sensitive to interest rate changes than liabilities, potentially increasing risk if rates rise. Conversely, a negative gap suggests the opposite. By analyzing these durations, businesses can better manage their interest rate risk and make informed decisions about investments and financing.