Fixed Asset Duration

Schwezer Practice Exam 1, Afternoon Q 44- Answer

Currently, Worth is “matching” its balance sheet asset/ liability durations by funding long-term assets with fixed liabilities. This minimizes equity volatility. Entering into a receive fixed, pay floating swap will reduce the absolute duration of the liabilities.

My question:

How does a fixed asset (IE building) have a duration on a balance sheet? I can see if they capitalized interest during construction, how it might have a some interest rate exposure. But not how it would have continued interest rate exposure.

An asset is worth the present value of the cash flows it generates; if interest rates change, present values change.

Cap rates are a good measure of real estate value for commercial. Higher rates means lower value. Annual net operating income divided by interest rate decimal form is the basic idea. Not a hard and fast rule but part of the valuation process.

Even your house has duration.

ahhhhh. Thank you everyone. I get it now.