Bank duration measure assets, interest, increase, positive

willsucceed

Rules:
LADG = Duration of Assets - Leveaged Duration of Liabilities.

If LADG>0 then for an increase in interest rates, the market value of equity goes down.

Issue:
If you have a greater duration of assets over liabilities I'm thinking that an increase in interest rates is a positive thing. Can anyone explain this more in depth?

ohai

In an extreme case, what if (Assets-Liabilities)<0, like those banks in 2008?

But I think A > L if not mentioned in the exam.

bkballa

if L > A and LADG < 0, then the opposite is true, an increase in interest rate helps your overall position. think of something like an underfunded pension plan for this sort of scenario...

Roflnadal

In your example, the value of your assets will decline more than the value of your liabilities. How is that a good thing? It's great a in a decreasing interest rate environment, but not increasing.

NO EXCUSES