Interest Rate Gap

AAA

DEFINITION of 'Interest Rate Gap'

The difference between fixed rate liabilities and fixed rate assets. Interest rate gap is a measurement of exposure to interest rate risk. The interest rate gap is used to show the risk of exposure and is used by financial institutions and investors to develop hedge positions, often through the use of interest rate futures. Calculations are dependent on the maturity date of the securities used in calculations, and the time period remaining before the securities reach maturity.


Interest rate gaps can also apply to the interest rates on the government securities of two different countries.

INVESTOPEDIA EXPLAINS 'Interest Rate Gap'

Unlike the liquidity gap, which takes into account all assets and liabilities, the interest rate gap only focuses on assets and liabilities which have a fixed rate. For example, a bank may borrow $100 million for 30 days at 5% interest, while at the same time loaning out $100 million for 60 days at 5.5%. An interest rate gap calculation would allow the bank to determine its 30v60 day forward rate.

RELATED TERMS
  1. Risk Management

    The process of identification, analysis and either acceptance ...
  2. Risk Premium

    The return in excess of the risk-free rate of return that an ...
  3. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
RELATED FAQS
  1. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  2. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  3. Why are the term structure of interest rates indicative of future interest rates?

    The term structure of interest rates is influenced by the expectations for future yields and interest rate risk according ... Read Full Answer >>
  4. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  5. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  6. How does the risk of investing in the utilities sector compare to the broader market?

    The risk of investing in the utilities sector is less than the broader market. The two main reasons are the high dividends ... Read Full Answer >>
Related Articles
  1. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  2. Forex Education

    The Greatest Currency Trades Ever Made

    These speculators took big positions - and scored huge profits - in the currency market.
  3. Forex Education

    Forex: Wading Into The Currency Market

    We go over the ground rules and available resources needed for this undertaking.
  4. Forex Education

    Economic Factors That Affect The Forex Market

    Knowing the factors and indicators to watch will help you keep pace in the competitive and fast-moving world of forex.
  5. Forex Education

    The Pros And Cons Of A Pegged Exchange Rate

    A pegged currency can give a country many advantages, but these advantages come at a price.
  6. Options & Futures

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  7. Investing

    Some Overseas Markets May Prove More Resilient

    Though global markets sold off and have continued to slip in recent days, stocks in Europe and Japan are still faring better than their U.S. counterparts.
  8. Stock Analysis

    Southwest & Cheap Oil: The Perfect Combination?

    Discover how falling oil prices (and well-timed futures contracts) benefit Southwest Airlines.
  9. Economics

    As Fed Prepares To Move, Gold Is Losing Its Luster

    Last week’s Semi-Annual Monetary Policy Report to Congress returned investors’ focus back to the fundamentals, and a general upbeat of the economy.
  10. Investing

    Five Portfolio Moves For The Second Half

    After a relatively calm few months, market volatility is back. If you are an investor, we help you prepare your portfolio with these five portfolio moves.

You May Also Like

Hot Definitions
  1. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  2. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  3. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  4. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  5. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  6. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!