Managing Interest Rate Risk
:
Duration GAP and Economic
Value of Equity
Chapter 6
Prof. Dr. Rainer Stachuletz
Banking Academy of Vietnam
Based upon: Bank Management, 6th edition.
Timothy W. Koch and S. Scott MacDonald
Prof. Dr. Rainer Stachuletz – Banking Academy of Vietnam  Hanoi
Measuring Interest Rate Risk with Duration
GAP
Economic Value of Equity Analysis
Focuses on changes in stockholders’
equity given potential changes in
interest rates
Duration GAP Analysis
Compares the price sensitivity of a
bank’s total assets with the price
sensitivity of its total liabilities to
assess the impact of potential changes
in interest rates on stockholders’
equity.
Recall from Chapter 4
Duration is a measure of the effective
maturity of a security.
Duration incorporates the timing and
size of a security’s cash flows.
Duration measures how price sensitive
a security is to changes in interest
rates.
The greater (shorter) the duration, the
greater (lesser) the price sensitivity.
Duration and Price Volatility
Duration as an Elasticity Measure
Duration versus Maturity
Consider the cash flows for these two
securities over the following time line
0 5 10 15 20
$1,000
0 5
900
10 15 20 1
$100
Duration versus Maturity
The maturity of both is 20 years
Maturity does not account for the differences in
timing of the cash flows
What is the effective maturity of both?
The effective maturity of the first security is:
(1,000/1,000) x 1 = 20 years
The effective maturity of the second security is:
[(900/1,000) x 1]+[(100/1,000) x 20] = 2.9 years
Duration is similar, however, it uses a
weighted average of the present values of the
cash flows
Duration versus Maturity
Duration is an approximate measure of
the price elasticity of demand
Price in Change %
Demanded Quantity in Change %
 Demand of Elasticity Price =
Duration versus Maturity
The longer the duration, the larger the
change in price for a given change in
interest rates.
i) (1
i
P
P
 Duration
+
A
A
~
P
i) (1
i
Duration  P
(
¸
(
¸
+
A
~ A
Measuring Duration
Duration is a weighted average of the
time until the expected cash flows
from a security will be received,
relative to the security’s price
Macaulay’s Duration
Security the of Price
r) + (1
(t) CF
r) + (1
CF
r) + (1
(t) CF
= D
n
1 = t
t
t
k
1 = t
t
t
k
1 = t
t
t
¿
¿
¿
=
Measuring Duration
Example
What is the duration of a bond with a
$1,000 face value, 10% annual coupon
payments, 3 years to maturity and a
12% YTM? The bond’s price is $951.96.
years 2.73 =
951.96
2,597.6
(1.12)
1000
+
(1.12)
100
(1.12)
3 1,000
+
(1.12)
3 100
+
(1.12)
2 100
+
(1.12)
1 100
D
3
1 = t
3 t
3 3 2
1
=
× × × ×
=
¿
Measuring Duration
Example
What is the duration of a bond with a
$1,000 face value, 10% coupon, 3 years
to maturity but the YTM is 5%?The
bond’s price is $1,136.16.
years 2.75 =
1,136.16
3,127.31
1136.16
(1.05)
3 * 1,000
+
(1.05)
3 * 100
+
(1.05)
2 * 100
+
(1.05)
1 * 100
D
3 3 2
1
= =
Measuring Duration
Example
What is the duration of a bond with a
$1,000 face value, 10% coupon, 3 years
to maturity but the YTM is 20%?The
bond’s price is $789.35.
years 2.68 =
789.35
2,131.95
789.35
(1.20)
3 * 1,000
+
(1.20)
3 * 100
+
(1.20)
2 * 100
+
(1.20)
1 * 100
D
3 3 2
1
= =
Measuring Duration
Example
What is the duration of a zero coupon
bond with a $1,000 face value, 3 years
to maturity but the YTM is 12%?
By definition, the duration of a zero
coupon bond is equal to its maturity
years 3 =
711.78
2,135.34
(1.12)
1,000
(1.12)
3 * 1,000
D
3
3
= =
Duration and Modified Duration
The greater the duration, the greater
the price sensitivity
Modified Duration gives an estimate of
price volatility:
i Duration Modified 
P
P
A × ~
A
i) (1
Duration s Macaulay'
Duration Modified
+
=
Effective Duration
Effective Duration
Used to estimate a security’s price
sensitivity when the security contains
embedded options.
Compares a security’s estimated price in
a falling and rising rate environment.
Effective Duration
Where:
P
i
= Price if rates fall
P
i+
= Price if rates rise
P
0
= Initial (current) price
i
+
= Initial market rate plus the increase in rate
i

= Initial market rate minus the decrease in rate
) i (i P
P P
Duration Effective

0
i  i


+
+
=
Effective Duration
Example
Consider a 3year, 9.4 percent semi
annual coupon bond selling for $10,000
par to yield 9.4 percent to maturity.
Macaulay’s Duration for the optionfree
version of this bond is 5.36 semiannual
periods, or 2.68 years.
The Modified Duration of this bond is
5.12 semiannual periods or 2.56 years.
Effective Duration
Example
Assume, instead, that the bond is
callable at par in the nearterm .
If rates fall, the price will not rise much
above the par value since it will likely
be called
If rates rise, the bond is unlikely to be
called and the price will fall
Effective Duration
Example
If rates rise 30 basis points to 5%
semiannually, the price will fall to
$9,847.72.
If rates fall 30 basis points to 4.4%
semiannually, the price will remain at
par
54 2
0
.
0.044) .05 $10,000(
9,847.72 $ $10,000
Duration Effective = =


Duration GAP
Duration GAP Model
Focuses on either managing the
market value of stockholders’ equity
The bank can protect EITHER the
market value of equity or net interest
income, but not both
Duration GAP analysis emphasizes the
impact on equity
Duration GAP
Duration GAP Analysis
Compares the duration of a bank’s
assets with the duration of the bank’s
liabilities and examines how the
economic value stockholders’ equity
will change when interest rates
change.
Two Types of Interest Rate Risk
Reinvestment Rate Risk
Changes in interest rates will change
the bank’s cost of funds as well as the
return on invested assets
Price Risk
Changes in interest rates will change
the market values of the bank’s assets
and liabilities
Reinvestment Rate Risk
If interest rates change, the bank will
have to reinvest the cash flows from
assets or refinance rolledover
liabilities at a different interest rate in
the future
An increase in rates increases a bank’s
return on assets but also increases the
bank’s cost of funds
Price Risk
If interest rates change, the value of
assets and liabilities also change.
The longer the duration, the larger the
change in value for a given change in
interest rates
Duration GAP considers the impact of
changing rates on the market value of
equity
Reinvestment Rate Risk and Price Risk
Reinvestment Rate Risk
If interest rates rise (fall), the yield from
the reinvestment of the cash flows
rises (falls) and the holding period
return (HPR) increases (decreases).
Price risk
If interest rates rise (fall), the price falls
(rises). Thus, if you sell the security
prior to maturity, the HPR falls (rises).
Reinvestment Rate Risk and Price Risk
Increases in interest rates will increase
the HPR from a higher reinvestment
rate but reduce the HPR from capital
losses if the security is sold prior to
maturity.
Decreases in interest rates will
decrease the HPR from a lower
reinvestment rate but increase the
HPR from capital gains if the security
is sold prior to maturity.
Reinvestment Rate Risk and Price Risk
An immunized security or portfolio is
one in which the gain from the higher
reinvestment rate is just offset by the
capital loss.
For an individual security,
immunization occurs when an
investor’s holding period equals the
duration of the security.
Steps in Duration GAP Analysis
Forecast interest rates.
Estimate the market values of bank assets,
liabilities and stockholders’ equity.
Estimate the weighted average duration of
assets and the weighted average duration of
liabilities.
Incorporate the effects of both on and off
balance sheet items. These estimates are
used to calculate duration gap.
Forecasts changes in the market value of
stockholders’ equity across different
interest rate environments.
Weighted Average Duration of Bank Assets
Weighted Average Duration of Bank
Assets (DA)
Where
w
i
= Market value of asset i divided by
the market value of all bank assets
Da
i
= Macaulay’s duration of asset i
n = number of different bank assets
¿
=
n
i
i i
Da w DA
Weighted Average Duration of Bank Liabilities
Weighted Average Duration of Bank
Liabilities (DL)
Where
z
j
= Market value of liability j divided by
the market value of all bank liabilities
Dl
j
= Macaulay’s duration of liability j
m = number of different bank liabilities
¿
=
m
j
j j
Dl z DL
Duration GAP and Economic Value of Equity
Let MVA and MVL equal the market values
of assets and liabilities, respectively.
If:
and
Duration GAP
Then:
where y = the general level of interest
rates
L (MVL/MVA)D  DA DGAP =
MVA
y) (1
y
DGAP  ΔEVE
(
¸
(
¸
+
A
=
ΔMVL ΔMVA ΔEVE ÷ =
Duration GAP and Economic Value of Equity
To protect the economic value of
equity against any change when rates
change , the bank could set the
duration gap to zero:
MVA
y) (1
y
DGAP  ΔEVE
(
¸
(
¸
+
A
=
1 Par Years Market
$1,000 % Coup Mat. YTM Value Dur.
Assets
Cash $100 100 $
Earning assets
3yr Commercial loan 700 $ 12.00% 3 12.00% 700 $ 2.69
6yr Treasury bond 200 $ 8.00% 6 8.00% 200 $ 4.99
Total Earning Assets 900 $ 11.11% 900 $
Noncash earning assets  $  $
Total assets 1,000 $ 10.00% 1,000 $ 2.88
Liabilities
Interest bearing liabs.
1yr Time deposit 620 $ 5.00% 1 5.00% 620 $ 1.00
3yr Certificate of deposit 300 $ 7.00% 3 7.00% 300 $ 2.81
Tot. Int Bearing Liabs. 920 $ 5.65% 920 $
Tot. nonint. bearing  $  $
Total liabilities 920 $ 5.65% 920 $ 1.59
Total equity 80 $ 80 $
Total liabs & equity 1,000 $ 1,000 $
Hypothetical Bank Balance Sheet
700
) 12 . 1 (
3 700
) 12 . 1 (
3 84
) 12 . 1 (
2 84
) 12 . 1 (
1 84
3 3 2 1
×
+
×
+
×
+
×
= D
Calculating DGAP
DA
($700/$1000)*2.69 + ($200/$1000)*4.99 = 2.88
DL
($620/$920)*1.00 + ($300/$920)*2.81 = 1.59
DGAP
2.88  (920/1000)*1.59 = 1.42 years
What does this tell us?
The average duration of assets is greater than the
average duration of liabilities; thus asset values
change by more than liability values.
1 Par Years Market
$1,000 % Coup Mat. YTM Value Dur.
Assets
Cash 100 $ 100 $
Earning assets
3yr Commercial loan 700 $ 12.00% 3 13.00% 683 $ 2.69
6yr Treasury bond 200 $ 8.00% 6 9.00% 191 $ 4.97
Total Earning Assets 900 $ 12.13% 875 $
Noncash earning assets  $  $
Total assets 1,000 $ 10.88% 975 $ 2.86
Liabilities
Interest bearing liabs.
1yr Time deposit 620 $ 5.00% 1 6.00% 614 $ 1.00
3yr Certificate of deposit 300 $ 7.00% 3 8.00% 292 $ 2.81
Tot. Int Bearing Liabs. 920 $ 6.64% 906 $
Tot. nonint. bearing  $  $
Total liabilities 920 $ 6.64% 906 $ 1.58
Total equity 80 $ 68 $
Total liabs & equity 1,000 $ 975 $
1 percent increase in all rates.
3
3
1 t
t
1.13
700
1.13
84
PV + =
¿
=
Calculating DGAP
DA
($683/$974)*2.68 + ($191/$974)*4.97 = 2.86
DA
($614/$906)*1.00 + ($292/$906)*2.80 = 1.58
DGAP
2.86  ($906/$974) * 1.58 = 1.36 years
What does 1.36 mean?
The average duration of assets is greater than the
average duration of liabilities, thus asset values
change by more than liability values.
Change in the Market Value of Equity
In this case:
MVA ]
y) (1
y
DGAP[  ΔEVE
+
A
=
91 12 000 1
10 1
01
. $ , $ ]
.
.
1.42[  ΔEVE ÷ = =
Positive and Negative Duration GAPs
Positive DGAP
Indicates that assets are more price sensitive
than liabilities, on average.
Thus, when interest rates rise (fall), assets will
fall proportionately more (less) in value than
liabilities and EVE will fall (rise) accordingly.
Negative DGAP
Indicates that weighted liabilities are more
price sensitive than weighted assets.
Thus, when interest rates rise (fall), assets will
fall proportionately less (more) in value that
liabilities and the EVE will rise (fall).
DGAP Summary
Assets Liabilities Equity
Positive Increase Decrease > Decrease → Decrease
Positive Decrease Increase > Increase → Increase
Negative Increase Decrease < Decrease → Increase
Negative Decrease Increase < Increase → Decrease
Zero Increase Decrease = Decrease → None
Zero Decrease Increase = Increase → None
DGAP Summary
DGAP
Change in
Interest
Rates
An Immunized Portfolio
To immunize the EVE from rate
changes in the example, the bank
would need to:
decrease the asset duration by 1.42
years or
increase the duration of liabilities by
1.54 years
DA / ( MVA/MVL)
= 1.42 / ($920 / $1,000)
= 1.54 years
1 Par Years Market
$1,000 % Coup Mat. YTM Value Dur.
Assets
Cash 100 $ 100 $
Earning assets
3yr Commercial loan 700 $ 12.00% 3 12.00% 700 $ 2.69
6yr Treasury bond 200 $ 8.00% 6 8.00% 200 $ 4.99
Total Earning Assets 900 $ 11.11% 900 $
Noncash earning assets  $  $
Total assets 1,000 $ 10.00% 1,000 $ 2.88
Liabilities
Interest bearing liabs.
1yr Time deposit 340 $ 5.00% 1 5.00% 340 $ 1.00
3yr Certificate of deposit 300 $ 7.00% 3 7.00% 300 $ 2.81
6yr Zerocoupon CD* 444 $ 0.00% 6 8.00% 280 $ 6.00
Tot. Int Bearing Liabs. 1,084 $ 6.57% 920 $
Tot. nonint. bearing  $  $
Total liabilities 1,084 $ 6.57% 920 $ 3.11
Total equity 80 $ 80 $
Immunized Portfolio
DGAP = 2.88 – 0.92 (3.11) ≈ 0
1 Par Years Market
$1,000 % Coup Mat. YTM Value Dur.
Assets
Cash 100.0 $ 100.0 $
Earning assets
3yr Commercial loan 700.0 $ 12.00% 3 13.00% 683.5 $ 2.69
6yr Treasury bond 200.0 $ 8.00% 6 9.00% 191.0 $ 4.97
Total Earning Assets 900.0 $ 12.13% 874.5 $
Noncash earning assets  $  $
Total assets 1,000.0 $ 10.88% 974.5 $ 2.86
Liabilities
Interest bearing liabs.
1yr Time deposit 340.0 $ 5.00% 1 6.00% 336.8 $ 1.00
3yr Certificate of deposit 300.0 $ 7.00% 3 8.00% 292.3 $ 2.81
6yr Zerocoupon CD* 444.3 $ 0.00% 6 9.00% 264.9 $ 6.00
Tot. Int Bearing Liabs. 1,084.3 $ 7.54% 894.0 $
Tot. nonint. bearing  $  $
Total liabilities 1,084.3 $ 7.54% 894.0 $ 3.07
Total equity 80.0 $ 80.5 $
Immunized Portfolio with a 1% increase in rates
Immunized Portfolio with a 1% increase in rates
EVE changed by only $0.5 with the
immunized portfolio versus $25.0
when the portfolio was not immunized.
Stabilizing the Book Value of Net Interest Income
This can be done for a 1year time horizon,
with the appropriate duration gap measure
DGAP* MVRSA(1 DRSA)  MVRSL(1 DRSL)
where:
MVRSA = cumulative market value of RSAs
MVRSL = cumulative market value of RSLs
DRSA = composite duration of RSAs for the
given time horizon
Equal to the sum of the products of each asset’s
duration with the relative share of its total asset
market value
DRSL = composite duration of RSLs for the
given time horizon
Equal to the sum of the products of each liability’s
duration with the relative share of its total liability
market value.
Stabilizing the Book Value of Net Interest Income
If DGAP* is positive, the bank’s net interest
income will decrease when interest rates
decrease, and increase when rates increase.
If DGAP* is negative, the relationship is
reversed.
Only when DGAP* equals zero is interest
rate risk eliminated.
Banks can use duration analysis to stabilize
a number of different variables reflecting
bank performance.
Economic Value of Equity Sensitivity Analysis
Effectively involves the same steps as
earnings sensitivity analysis.
In EVE analysis, however, the bank
focuses on:
The relative durations of assets and
liabilities
How much the durations change in
different interest rate environments
What happens to the economic value of
equity across different rate environments
Embedded Options
Embedded options sharply influence the
estimated volatility in EVE
Prepayments that exceed (fall short of)
that expected will shorten (lengthen)
duration.
A bond being called will shorten duration.
A deposit that is withdrawn early will
shorten duration.
A deposit that is not withdrawn as
expected will lengthen duration.
Book Value Market Value Book Yield Duration*
Loans
Prime Based Ln $ 100,000 $ 102,000 9.00%
Equity Credit Lines $ 25,000 $ 25,500 8.75% 
Fixed Rate > I yr $ 170,000 $ 170,850 7.50% 1.1
Var Rate Mtg 1 Yr $ 55,000 $ 54,725 6.90% 0.5
30Year Mortgage $ 250,000 $ 245,000 7.60% 6.0
Consumer Ln $ 100,000 $ 100,500 8.00% 1.9
Credit Card $ 25,000 $ 25,000 14.00% 1.0
Total Loans $ 725,000 $ 723,575 8.03% 2.6
Loan Loss Reserve $ (15,000) $ 11,250 0.00% 8.0
Net Loans $ 710,000 $ 712,325 8.03% 2.5
I nvestments
Eurodollars $ 80,000 $ 80,000 5.50% 0.1
CMO Fix Rate $ 35,000 $ 34,825 6.25% 2.0
US Treasury $ 75,000 $ 74,813 5.80% 1.8
Total Investments $ 190,000 $ 189,638 5.76% 1.1
Fed Funds Sold $ 25,000 $ 25,000 5.25% 
Cash & Due From $ 15,000 $ 15,000 0.00% 6.5
Nonint Rel Assets $ 60,000 $ 60,000 0.00% 8.0
Total Assets $ 100,000 $ 100,000 6.93% 2.6
First Savings Bank Economic Value of Equity
Market Value/Duration Report as of 12/31/04
Most Likely Rate ScenarioBase Strategy
A
s
s
e
t
s
Book Value Market Value Book Yield Duration*
Deposits
MMDA $ 240,000 $ 232,800 2.25% 
Retail CDs $ 400,000 $ 400,000 5.40% 1.1
Savings $ 35,000 $ 33,600 4.00% 1.9
NOW $ 40,000 $ 38,800 2.00% 1.9
DDA Personal $ 55,000 $ 52,250 8.0
Comm'l DDA $ 60,000 $ 58,200 4.8
Total Deposits $ 830,000 $ 815,650 1.6
TT&L $ 25,000 $ 25,000 5.00% 
LT Notes Fixed $ 50,000 $ 50,250 8.00% 5.9
Fed Funds Purch   5.25% 
NIR Liabilities $ 30,000 $ 28,500 8.0
Total Liabilities $ 935,000 $ 919,400 2.0
Equity $ 65,000 $ 82,563 9.9
Total Liab & Equity $ 1,000,000 $ 1,001,963 2.6
Off Balance Sheet Notional
lnt Rate Swaps  $ 1,250 6.00% 2.8 50,000
Adjusted Equity $ 65,000 $ 83,813 7.9
First Savings Bank Economic Value of Equity
Market Value/Duration Report as of 12/31/04
Most Likely Rate ScenarioBase Strategy
L
i
a
b
i
l
i
t
i
e
s
Duration Gap for First Savings Bank EVE
Market Value of Assets
$1,001,963
Duration of Assets
2.6 years
Market Value of Liabilities
$919,400
Duration of Liabilities
2.0 years
Duration Gap for First Savings Bank EVE
Duration Gap
= 2.6 – ($919,400/$1,001,963)*2.0
= 0.765 years
Example:
A 1% increase in rates would reduce
EVE by $7.2 million
= 0.765 (0.01 / 1.0693) * $1,001,963
Recall that the average rate on assets
is 6.93%
Sensitivity of EVE versus Most Likely (Zero Shock)
Interest Rate Scenario
2
(10.0)
20.0
10.0
8.8 8.2
(8.2)
(20.4)
(36.6)
13.6
ALCO Guideline
Board Limit
(20.0)
(30.0)
C
h
a
n
g
e
i
n
E
V
E
(
m
i
l
l
i
o
n
s
o
f
d
o
l
l
a
r
s
)
(40.0)
300 200 100 +100 +200 +300 0
Shocks to Current Rates
Sensitivity of Economic Value of Equity measures the change in the economic value of
the corporation’s equity under various changes in interest rates. Rate changes are
instantaneous changes from current rates. The change in economic value of equity is
derived from the difference between changes in the market value of assets and changes
in the market value of liabilities.
Effective “Duration” of Equity
By definition, duration measures the
percentage change in market value for
a given change in interest rates
Thus, a bank’s duration of equity
measures the percentage change in
EVE that will occur with a 1 percent
change in rates:
Effective duration of equity
9.9 yrs. = $8,200 / $82,563
Asset/Liability Sensitivity and DGAP
Funding GAP and Duration GAP are NOT
directly comparable
Funding GAP examines various “time
buckets” while Duration GAP represents
the entire balance sheet.
Generally, if a bank is liability (asset)
sensitive in the sense that net interest
income falls (rises) when rates rise and
vice versa, it will likely have a positive
(negative) DGAP suggesting that assets
are more price sensitive than liabilities, on
average.
Strengths and Weaknesses: DGAP and EVE
Sensitivity Analysis
Strengths
Duration analysis provides a
comprehensive measure of interest rate
risk
Duration measures are additive
This allows for the matching of total
assets with total liabilities rather than the
matching of individual accounts
Duration analysis takes a longer term
view than static gap analysis
Strengths and Weaknesses: DGAP and EVE
Sensitivity Analysis
Weaknesses
It is difficult to compute duration
accurately
“Correct” duration analysis requires that
each future cash flow be discounted by a
distinct discount rate
A bank must continuously monitor and
adjust the duration of its portfolio
It is difficult to estimate the duration on
assets and liabilities that do not earn or
pay interest
Duration measures are highly subjective
Speculating on Duration GAP
It is difficult to actively vary GAP or
DGAP and consistently win
Interest rates forecasts are frequently
wrong
Even if rates change as predicted,
banks have limited flexibility in vary
GAP and DGAP and must often
sacrifice yield to do so
Gap and DGAP Management Strategies
Example
Cash flows from investing $1,000 either
in a 2year security yielding 6 percent or
two consecutive 1year securities, with
the current 1year yield equal to 5.5
percent. 0 1 2
$60 $60
TwoYear Security
0 1 2
$55 ?
OneYear Security & then
another OneYear Security
Gap and DGAP Management Strategies
Example
It is not known today what a 1year
security will yield in one year.
For the two consecutive 1year
securities to generate the same $120
in interest, ignoring compounding, the
1year security must yield 6.5% one
year from the present.
This breakeven rate is a 1year
forward rate, one year from the
present:
6% + 6% = 5.5% + x
so x must = 6.5%
Gap and DGAP Management Strategies
Example
By investing in the 1year security, a
depositor is betting that the 1year
interest rate in one year will be greater
than 6.5%
By issuing the 2year security, the
bank is betting that the 1year interest
rate in one year will be greater than
6.5%
Yield Curve Strategy
When the U.S. economy hits its peak,
the yield curve typically inverts, with
shortterm rates exceeding longterm
rates.
Only twice since WWII has a recession
not followed an inverted yield curve
As the economy contracts, the Federal
Reserve typically increases the money
supply, which causes the rates to fall
and the yield curve to return to its
“normal” shape.
Yield Curve Strategy
To take advantage of this trend, when
the yield curve inverts, banks could:
Buy longterm noncallable securities
Prices will rise as rates fall
Make fixedrate noncallable loans
Borrowers are locked into higher rates
Price deposits on a floatingrate basis
Lengthen the duration of assets
relative to the duration of liabilities
Interest Rates and the Business Cycle
The general level of interest rates and the shape of the yield curve
appear to follow the U.S. business cycle.
In expansionary
stages rates rise until
they reach a peak as
the Federal Reserve
tightens credit
availability.
T i m e
I
n
t
e
r
e
s
t
R
a
t
e
s
(
P
e
r
c
e
n
t
)
E x p a n s i o n
C o n t r a c t i o n
E x p a n s i o n
L o n g  T e r m R a t e s
S h o r t  T e r m R a t e s
P e a k
T r o u g h
DATE WHEN 1YEAR RATE
FIRST EXCEEDS 10YEAR RATE
LENGTH OF TIME UNTIL
START OF NEXT RECESSION
Apr. ’68 20 months (Dec. ’69)
Mar. ’73 8 months (Nov. ’73)
Sept. ’78 16 months (Jan. ’80)
Sept. ’80 10 months (July ’81)
Feb. ’89 17 months (July ’90)
Dec. ’00 15 months (March ’01)
The inverted yield curve has predicted the last
five recessions
In contractionary
stages rates fall until
they reach a trough
when the U.S.
economy falls into
recession.
Prof. Dr. Rainer Stachuletz edited and updated the PowerPoint slides for this edition.
Managing Interest Rate Risk:
Duration GAP and Economic Value
of Equity
Chapter 6
Bank Management, 6th edition.
Timothy W. Koch and S. Scott MacDonald
Copyright © 2006 by SouthWestern, a division of Thomson Learning