Interest Rate Gap

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.

BREAKING DOWN '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.

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