Capital Markets Examiner School, Providence, RI

Short-term vs. Long-term IRR

• Earnings‐at‐risk simulations • NII and NI • GAP

Short‐term IRR  Measurements

• Equity‐at‐risk • Economic Value of Equity (EVE) • Duration

Long‐term IRR  Measurements

Earnings-at-Risk: short-term IRR

 Earnings-at-risk is a measurement of how much the bank’s margin could change given a change in interest rates.

 Short-term = 1 year or less.

 Short-term interest rate risk is measured by initially establishing a one year earnings forecast (which may include a dynamic market rate forecast, earnings growth, and balance mix & volume changes).  The earnings at risk is the negative change between the base forecast and one of the "shock" scenarios. The measure is usually stated as a percentage change from the base income.