> Suppose I were to give you $100, in return for your promise to give it back when I wanted it and pay me 0.27% annualized interest in the meanwhile. Suppose yo

> Suppose I were to give you $100, in return for your promise to give it back when I wanted it and pay me 0.27% annualized interest in the meanwhile. Suppose you invested this in a virtually riskless bond, perhaps a mortgage-backed security with government backing, offering 2.53% annualized interest. You’d earn $2.26 in net interest in a year. How would you rectify the duration mismatch between the on-demand deposit (of $100) with the multi-year mortgage-backed security? For example, if the rate of interest increases, my $100 — that you invested in bonds — will now be worth less than $100 (since the price of the bond has fallen). How will you be able to honor my withdrawal when you’re insolvent?