Enter Values
Key Formulas
Analysis Results
Rate Sensitivity Analysis
| Rate Change | ΔNII ($M) | % of Equity |
|---|---|---|
| -200 bps | -- | -- |
| -150 bps | -- | -- |
| -100 bps | -- | -- |
| -50 bps | -- | -- |
| Current (0 bps) | -- | -- |
| +50 bps | -- | -- |
| +100 bps | -- | -- |
| +150 bps | -- | -- |
| +200 bps | -- | -- |
Gap Visualization
Formula Breakdown
Model Assumptions
- Parallel yield curve shift only (no twist or butterfly movements)
- Linear duration approximation (no convexity adjustment)
- Macaulay duration convention — formula converts to modified duration sensitivity via (1+i) denominator
- Single repricing bucket — ΔNII represents one repricing period
- Common interest rate applied to both asset and liability portfolios
- Static balance sheet (no growth, runoff, or new business)
- No prepayment or behavioral optionality
- Risk thresholds are illustrative teaching heuristics, not regulatory standards
For educational purposes. Not financial advice. Market conventions simplified.
Understanding Interest Rate Gap & Duration Gap Analysis
Income Gap Analysis
Income gap analysis is a fundamental tool in bank asset-liability management (ALM). It measures the difference between rate-sensitive assets (RSA) and rate-sensitive liabilities (RSL) within a given repricing period. When rates change, the gap determines how net interest income (NII) is affected.
A negative gap (RSL > RSA) means the bank is liability-sensitive: rising rates hurt NII because expenses increase faster than income. A positive gap (RSA > RSL) means the bank is asset-sensitive: rising rates boost NII.
Duration Gap Analysis
Duration gap analysis takes a market-value perspective, measuring how the economic value of equity (EVE) changes when interest rates shift. The duration gap formula accounts for leverage by weighting liability duration by the ratio of liabilities to assets.
A positive duration gap means asset durations exceed leverage-adjusted liability durations. When rates rise, asset values fall more than liability values, reducing equity. The magnitude of the duration gap determines the bank's exposure to rate movements.
Managing Interest Rate Risk
Banks manage interest rate risk through balance sheet restructuring (adjusting the mix of fixed vs variable rate instruments), interest rate derivatives (swaps, caps, floors, futures), and duration matching strategies. Effective ALM requires monitoring both income and market-value exposures.
Limitations
Both gap and duration analysis have important limitations. They assume parallel rate shifts, use single repricing buckets, and treat all rate-sensitive items as equally responsive to rate changes. Duration analysis also uses a linear approximation that ignores convexity. These tools provide useful approximations for educational understanding but real-world ALM uses more sophisticated models.
Frequently Asked Questions
Disclaimer
This calculator is for educational purposes only. It uses simplified assumptions including parallel rate shifts, single repricing buckets, linear duration approximation without convexity, and a static balance sheet. Risk assessment thresholds are illustrative teaching heuristics, not regulatory standards. For actual bank ALM analysis, consult professional risk management tools and regulatory guidelines.
