Zero-Gap Condition

AAA

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.

INVESTOPEDIA EXPLAINS '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. Mismatch

    In general, this means to match incorrectly or unsuitably. In ...
  2. Sensitivity Analysis

    A technique used to determine how different values of an independent ...
  3. Effective Duration

    A duration calculation for bonds with embedded options. Effective ...
  4. Sensitivity

    The magnitude of a financial instrument's reaction to changes ...
  5. Duration

    A measure of the sensitivity of the price (the value of principal) ...
  6. Operating Cost

    Expenses associated with administering a business on a day to ...
RELATED FAQS
  1. Why is the use of contra accounts so important for maintaining ledgers?

    Contra accounts have been used in financial accounting to verify the balance of another corresponding account since Renaissance ... Read Full Answer >>
  2. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  3. How is deferred revenue treated under accrual accounting?

    In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds ... Read Full Answer >>
  4. What are some of the advantages and disadvantages of absorption costing?

    Companies must choose between using absorption costing or variable costing in their accounting systems. There are advantages ... Read Full Answer >>
  5. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  6. Why does zero-based budgeting require ongoing evaluation and management?

    Zero-based budgeting must have ongoing evaluation and management due to the fact a zero-based budget requires management ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Use Duration And Convexity To Measure Bond Risk

    Find out how this measure can help fixed-income investors manage their portfolios.
  2. Options & Futures

    Immunization Inoculates Against Interest Rate Risk

    Big-money investors can hedge against bond portfolio losses caused by rate fluctuations.
  3. Retirement

    Mortgage Asset-Liability Management Made Easy

    Should you refinance your mortgage to purchase other assets? Learn how to weigh your risk.
  4. Economics

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  5. Economics

    Understanding the Accounting Cycle

    An accounting cycle consists of the traditional procedures performed to record business events and transactions in a company’s accounting records.
  6. Fundamental Analysis

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  7. Fundamental Analysis

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  8. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  9. Economics

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.
  10. Economics

    Explaining Risk-Weighted Assets

    Risk-weighted assets is a banking term that refers to a method of measuring the risk inherent in a bank’s assets, which is typically its loan portfolio.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center