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The purpose of DGAP analysis is to provide a measure of the impact of unexpected interest rate changes on the market value of owners' equity, i.e. net worth. A duration gap measures the cash flow timing characteristics of assets and liabilities. The duration gap considers both reinvestment and price risk. It has an advantage of measuring potential change in the value of institutions equity as interest rates change. Because it is based on duration measures for assets and liabilities, the duration gap captures the joint effects of maturity, coupon (or stated interest rate) and required market yields on changes in market value. Central to DGAP Analysis I. Market yields and market prices move in opposite directions. A rise in market rates of interest will cause the market value of both fixed-rate assets and liabilities to decline. II. The longer the maturity of a fixed rate financial instrument, the greater will be the change in...

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