What is the basic difference between gap analysis and duration analysis?

What is the basic difference between gap analysis and duration analysis?

• A. Gap analysis examines the timing difference between rate-sensitive assets and liabilities; duration measures sensitivity of asset/liability values to interest rate changes.
• B. Gap analysis measures liquidity; duration measures credit risk.
• C. Gap analysis measures cash flow stability; duration measures accounting depreciation.
• D. Gap analysis and duration analysis are the same.

Answer: (A)

Gap analysis focuses on the timing of cash flows and re-pricing between rate-sensitive assets and liabilities to identify liquidity gaps. Duration analysis, meanwhile, estimates how the values of those assets and liabilities would change with changes in interest rates, i.e., it measures interest-rate risk or price sensitivity. The essential difference is timing versus sensitivity to rate movements. This is why the best description is that gap analysis looks at when assets and liabilities reprice, while duration measures how much value would change for given interest-rate shifts. The other options mix in concepts like credit risk or depreciation, which aren’t what duration or gap analysis primarily assess.

Gap analysis focuses on the timing of cash flows and re-pricing between rate-sensitive assets and liabilities to identify liquidity gaps. Duration analysis, meanwhile, estimates how the values of those assets and liabilities would change with changes in interest rates, i.e., it measures interest-rate risk or price sensitivity. The essential difference is timing versus sensitivity to rate movements. This is why the best description is that gap analysis looks at when assets and liabilities reprice, while duration measures how much value would change for given interest-rate shifts. The other options mix in concepts like credit risk or depreciation, which aren’t what duration or gap analysis primarily assess.