BFF2401 Chap.7 Interest-Rate Risk and Duration Gap

Interest-Rate Risk and Duration Gap

Define repricing gap

The course material gives this chapter a concrete anchor: Week 8 is officially Interest Rate Risk; the bounded framework separates repricing-income and duration-value effects.

That repricing gap anchor controls how duration gap is explained and how deposit beta is tested in changed practice.

Interest-Rate Risk and Duration Gap is a quantitative decision problem built from repricing gap, duration gap and deposit beta.

The aim is to estimate net-interest and economic-value sensitivity to rate changes; a numerical result earns meaning only when the variables, units, assumptions and comparison are all explicit.

Begin with repricing gap: state what quantity it represents, the scale on which it is measured and the condition under which it changes.

Then map every symbol in the Interest-Rate Risk and Duration Gap formula checkpoint to repricing gap before calculation begins.

Next connect duration gap to the calculation. Show the duration gap transformation line by line, preserve units and signs, and make any denominator or baseline visible.

A duration gap calculator output is not a method; the reader must be able to reconstruct why that operation answers the question.

Trace duration gap

Use deposit beta to interpret or stress-test the result.

Ask whether the deposit beta magnitude is plausible, whether a boundary case behaves as expected and which conclusion would reverse if an assumption changed. This is where computation becomes analysis rather than arithmetic.

When the task is to estimate net-interest and economic-value sensitivity to rate changes, separate inputs supplied by the problem from quantities you derive.

Then report the deposit beta result in the language of the course and attach the relevant uncertainty, limitation or decision consequence.

Build a representation check before solving. Put repricing gap, duration gap and deposit beta into a small symbol-and-units table, mark which values are observed and which are calculated, and predict the direction of the result before doing arithmetic.

A sign, scale or unit mismatch in repricing gap then becomes visible at setup instead of being hidden inside a polished final number.

Run one sensitivity test after the baseline answer. Change the input most closely connected to duration gap, hold the remaining assumptions fixed and recompute only the affected steps. Explain whether the movement in deposit beta matches the mechanism.

This duration gap sensitivity shows which assumption controls the conclusion and prevents a single scenario from being presented as universal.

Test with deposit beta

Use a three-column repricing gap error log for bff2401: translation error, calculation error and interpretation error.

Record the exact line where the duration gap solution first diverged, rewrite that line, and check it with a limiting case or an independent calculation.

Correcting the first failed duration gap move is more useful than copying the complete solution again.

A complete response should make the task visible before the detail: identify what must be decided, define the relevant terms, connect the evidence to duration gap, and use deposit beta to test the result.

The final sentence about deposit beta should answer the question actually asked rather than merely repeat the topic.

The controlling limit is specific: Parallel shifts, stable balances and contractual repricing assumptions often fail for deposits, prepayment and optionality.

Keep that deposit beta limit beside the worked example, because it separates a careful bff2401 answer from one that sounds confident but claims more than the task or evidence supports.

For revision, retrieve repricing gap, duration gap and deposit beta without notes, explain their relationship aloud, then complete a changed version of the application: estimate net-interest and economic-value sensitivity to rate changes.

Record the first failed duration gap reasoning move and repair it before attempting another case.

What this chapter covers

• 01

  repricing gap

• 02

  duration gap

• 03

  deposit beta

• 04

  Applying repricing gap

• 05

  Limits of duration gap and deposit beta

Estimate duration-gap impact

Key terms

repricing gap

Rate-sensitive assets minus rate-sensitive liabilities within a defined time bucket. This chapter uses the concept when students estimate net-interest and economic-value sensitivity to rate changes. Use this definition when the task is to estimate net-interest and economic-value sensitivity to rate changes.

duration gap

Asset duration less leverage-adjusted liability duration under a stated convention. It helps explain the reasoning required to estimate net-interest and economic-value sensitivity to rate changes. Use this definition when the task is to estimate net-interest and economic-value sensitivity to rate changes.

deposit beta

Extent to which deposit rates change relative to a market-rate movement. Its limit matters because parallel shifts, stable balances and contractual repricing assumptions often fail for deposits, prepayment and optionality. Use this definition when the task is to estimate net-interest and economic-value sensitivity to rate changes.

Interest-Rate Risk and Duration Gap FAQ

Assessment move

Reconstruct the relationship among repricing gap, duration gap and deposit beta; complete the chapter application without notes; then test the result against this limit: Parallel shifts, stable balances and contractual repricing assumptions often fail for deposits, prepayment and optionality.

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