Measuring Net Duration of a Bank, A practical example
Net duration of bank implies the gap between duration of its earning assets and duration of liabilities. A duration gap or net duration of a balance sheet measures the gap or mis-match between timings of cash flows received from assets versus those payable against liabilities/ deposits. This article is about calculating and measuring Net Duration, i.e. duration gap of a balance sheet. This is explained with the help of practical example along with reference to definitions of Durations and Duration Gap of Balance Sheet. How to define Duration of an asset or deposit. Duration of asset or liability in its simple form, refers to time period during which an asset or liability travels towards its maturity date or converts into cash flow. For assets having multiple cash flows or coupons before maturity, Duration is also defined as weighted average of the time until expected maturity/cash flow from a security or assets. Duratio...