duration of equity

duration of equity
An application of duration analysis that measures the interest rate sensitivity of the bank as whole. Duration of equity views the bank's equity as if it were a bond. This " bond" has a stream of obligations for future cash inflows. Those are the cash flows from the bank's assets. It also has a stream of obligations for future cash outflows. Those are the cash flows from the bank's liabilities. When the present value weighted average for the asset cash flows is calculated and reduced by the total of the present value weighted cash flows from the liabilities, then the duration of the equity " bond" is determined. It is expressed by the formula: duration of equity = duration of assets minus (the duration of liabilities times (total liabilities divided by total assets)). American Banker Glossary

Financial and business terms. 2012.

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