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Duration Of Equity Financial Glossary

What is it? An application of duration analysis that measures the interest rate sensitivity of the bank as whole. Duration of equity views the banks 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 banks assets. It also has a stream of obligations for future cash outflows. Those are the cash flows from the banks 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)).

Finance Term Definition Added By: Sophia

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