If FIs borrow short-term from depositors and purchase long-term bonds, what risk are they exposed to?
A)liquidity risk
B)credit risk
C)interest rate risk
D)default risk

Question

Quizplus · Accepted Answer

When FIs borrow short-term to purchase long-term bonds, they expose themselves to interest rate risk, which refers to the uncertainty surrounding changes in interest rates. If interest rates rise, the cost of borrowing increases for FIs, while the value of their bond holdings decreases, potentially leading to losses. If interest rates fall, the opposite occurs, potentially leading to gains for FIs. However, interest rate movements are difficult to predict, which makes managing interest rate risk challenging for FIs.

If FIs Borrow Short-Term from Depositors and Purchase Long-Term Bonds