Duration gap
Macaulay duration less the investment horizon. Positive leaves you exposed to rates rising, negative to them falling; matched, the two risks cancel.
Where you will meet it
Duration gap appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Explain the investment horizon and the gap in duration relative to it
“The duration gap is Macaulay duration less the investment horizon: a positive gap leaves the investor exposed to rising rates through price risk, and a negative gap exposes them to falling rates through reinvestment risk.”
- Contrast approaches to one liability with approaches to a schedule of liabilities, and the different ways each can be implemented
“Receive-fixed swaps or bond futures can close a duration gap without selling assets.”
- Explain what shapes how banks and insurance companies manage their balance sheets
“A key measure is the leverage-adjusted duration gap: DA − (L ÷ A) × DL.”
See also
Practise it
Practise duration gap until it is automatic: questions that explain every wrong option.
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