Which method is preferred for disclosing interest-rate risk?

Disclosing interest-rate risk is crucial for understanding how fluctuations in interest rates can affect the value of financial assets and liabilities. Among the methods typically used for this purpose, duration stands out as the most preferred measure.

Duration provides a weighted average time until cash flows from an investment are received, effectively capturing the sensitivity of the asset's price to changes in interest rates. It quantifies how much the price of an asset will change in response to a change in interest rates, thus providing clear insight into interest-rate risk exposure. This ability to summarize cash flow timing and interest rate changes in a single metric makes duration a powerful tool for investors and financial institutions.

In contrast, segmented time distribution provides a breakdown of cash flows by specific time intervals but does not directly measure interest rate sensitivity. Weighted average maturity offers insight into the average time until cash flows are received but similarly lacks clarity on the impact of interest rate changes on the asset’s price.

Given that duration encapsulates both the timing of cash flows and their sensitivity to interest rate changes, it is widely recognized as the best practice for disclosing interest-rate risk.