BAS Case Study - March 2023
APPENDIX F – HOW ECONOMIC VALUE OF EQUITY WORKS
Volatility is a function of duration . Longer-term = greater changes in economic value.
For assets and liabilities, economic value will drop with rising rates
Economic value of liabilities declines because these are more valuable in relation to new higher-cost products (since equity is calculated as assets minus liabilities, a reduction in the volume of liabilities results in a higher amount of equity)
Assets become less valuable compared to new higher-yielding products.
For assets and liabilities, economic value will rise with falling rates
Assets are more valuable when rates decline because new products are lower-yielding.
Economic value of liabilities increase because these are less valuable compared to new lower-cost products.
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