I don’t understand how the duration of assets of a financial entity is greater than the duration of liabilities, which causes assets’ value to decrease more than the value of liabilities if there is an interest increase. Could someone help me understand the particularity about assets that makes their duration greater? Thanks
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Duration gap doesn’t imply one way or the other which one lasts longer. Either situation can happen.
Let’s say you have a patent that’s expected to return royalties for the next 20 years and you are still amortizing the debt from the R&D process over ten years. You have a positive duration gap. But, if you have a TV show that will only run a few more seasons but you’ll still be paying off the studio for 30 more years, you have a negative duration gap. Either can happen. It depends on the nature of the assets, the nature of the liabilities, and the accounting practices that were chosen.
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