Zero-Gap Condition

DEFINITION of 'Zero-Gap Condition'

When a financial institution's interest rate-sensitive assets and liabilities are in perfect balance for a given maturity. The condition derives its name from the fact that the duration gap - or the difference in the sensitivity of an institution's assets and liabilities to changes in interest rates - is zero.

BREAKING DOWN 'Zero-Gap Condition'

Financial institutions are exposed to interest rate risk when the interest sensitivity of their assets differs from the interest sensitivity of their liabilities. A zero-gap condition immunizes an institution from interest rate risk by ensuring that a change in interest rates will not affect the overall value of the firm's net worth.

RELATED TERMS
  1. Dynamic Gap

    Refers to asset and liability risk management at financial institutions. ...
  2. Interest Rate Gap

    The difference between fixed rate liabilities and fixed rate ...
  3. Net Interest Income

    The difference between the revenue that is generated from a bank's ...
  4. Interest Rate Sensitivity

    A measure of how much the price of a fixed-income asset will ...
  5. Maturity Gap

    A measurement of interest rate risk for risk-sensitive assets ...
  6. Sensitivity

    The magnitude of a financial instrument's reaction to changes ...
Related Articles
  1. Investing Basics

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
  2. Economics

    Understanding Total Liabilities

    Total liabilities are the combined debts an individual or company owes.
  3. Fundamental Analysis

    Reviewing Liabilities On The Balance Sheet

    As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.
  4. Options & Futures

    Immunization Inoculates Against Interest Rate Risk

    Big-money investors can hedge against bond portfolio losses caused by rate fluctuations.
  5. Investing

    What's a Liability?

    A liability is a debt. It is an obligation that arises during the course of business and represents a third-party claim on the company's assets. A liability can arise in a number of different ...
  6. Economics

    Explaining Long-Term Liability

    A long-term liability is an obligation a company owes a year or more into the future.
  7. Economics

    The Effect of Fed Fund Rate Hikes on Your Bond Portfolio

    Learn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk.
  8. Personal Finance

    What is Net Worth?

    Net worth is the amount by which assets exceed liabilities. Another way to say this is, it's the value of everything you own, minus all your debts.
  9. Investing

    Current Liabilities

    Current Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
  10. Bonds & Fixed Income

    What Does Duration Mean?

    Duration measures a fixed-income’s sensitivity to changes in interest rates.
RELATED FAQS
  1. What is the difference between an expense and a liability?

    Learn what liabilities and expenses are, which financial statements they are listed on, and the differences between liabilities ... Read Answer >>
  2. What kinds of liabilities appear on the balance sheet?

    Learn what current and non-current liabilities are, the difference between the two, and examples of liabilities that a company ... Read Answer >>
  3. On which financial statements does a company report its long-term debt?

    Discover which financial statements are used to report a company’s long-term debt, as well as how a company uses debt to ... Read Answer >>
  4. Do working capital funds expire?

    Find out how and why a company's working capital can change over time, though the fund does not actually expire, and how ... Read Answer >>
  5. What does a climbing interest rate risk signify about the economy?

    Learn what a climbing interest rate risk signifies for the economy. Interest rate risk is heightened with inflationary pressures ... Read Answer >>
  6. How can I use a bond's duration to predict its return?

    Learn how the concept of duration is used to determine when future cash flows for a bond will equal the amount paid for the ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center