Editing Duration gap (section)

==Measurement ==
Formally, the duration gap is the difference between the [[Bond duration|duration]] - i.e. the [[Bond_duration#Modified_duration|average ''maturity'']] - of [[asset]]s and [[liability (financial accounting)|liabilities]] held by a financial entity.<ref name="LeeLee2006">{{cite book|last1=Lee|first1=Cheng-Few|last2=Lee|first2=Alice C.|title=Encyclopedia of Finance|url=https://books.google.com/books?id=I6BH-RKYVG4C&pg=PA423|accessdate=15 February 2013|date=2006-05-05|publisher=Springer|isbn=9780387262840|pages=423–}}</ref> 
A [[Bond_duration#Modified_duration|related approach]] is to see the "duration gap" as the difference in the [[PV01|price sensitivity]] of interest-yielding assets and the price sensitivity of liabilities (of the organization) to a change in market interest rates (yields).<ref name="Skinner2004">{{cite book|last=Skinner|first=Frank|title=Pricing and Hedging Interest and Credit Risk Sensitive Instruments|url=https://books.google.com/books?id=2OAkxj2hAkgC&pg=PA218|accessdate=15 February 2013|date=2004-10-29|publisher=Butterworth-Heinemann|isbn=9780080473956|pages=218–}}</ref>

Under either, a gap can be beneficial or harmful, depending on where interest rates are headed.
*When the duration of assets is larger than the duration of liabilities, the duration gap is positive. In this situation, if [[Interest|interest rates]] rise, assets will lose more value than liabilities, thus reducing the value of the firm's equity. If interest rates fall, assets will gain more value than liabilities, thus increasing the value of the firm's equity.
*Conversely, when the duration of assets is less than the duration of liabilities, the duration gap is negative. If interest rates rise, liabilities will lose more value than assets, thus increasing the value of the firm's equity. If interest rates decline, liabilities will gain more value than assets, thus decreasing the value of the firm's equity.