negative duration

Definitions (2)

1. In banking, the situation where the total duration of a bank's assets is shorter than that of its liabilities. Hence the duration of its equity is negative because its long-term liabilities are funded by its short-term assets. The theoretical value of the bank's equity will rise and fall with the rise and fall of interest rates.
2. In securities trading, an uncommon situation where the traditional yield-price ratio is reversed: a bond's price increases as the interest rates go up, and decreases when the interest rates fall. For example, a callable bond with the call in effect will sell at a yield that is about the same as the coupon rate. Any fall in its yield will not increase its price because it is already selling at its peak price due to the call. The term 'duration' refers to modified duration which is the Macaulay duration adjusted for compounding.

Use negative duration in a sentence

There was a negative duration happening and that made me a bit nervous and confused and I did not know how to handle what was happening.

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When I don't have enough money to pay off my credit card bill, I simply say I overspent, whereas a banker may say something like, "You have negative duration."

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