any reason why for an increase in interest rate when LADG is < 0, the market value of equity will rise? is is due to the liab is more interest rate sensitive than assets? thanks
Assets are less sensitive than liabilities. Increase in rates will have more of an effect on liabilities, thus increasing equity.
actually, assets aren’t necessarily less sentivie than liabilities, it’s just that if LADG<0, then duration of liabilities must be > duration of assets, hence the increase in MVE when rates increase.