A bank that expects interest rates to fall will

Question

Quizplus · Accepted Answer

If interest rates are expected to fall, a bank would want to maximize the value of its assets, which means increasing their duration. This can be achieved by investing in longer-term assets or assets with fixed or semi-fixed interest rates, which will increase in value as rates fall. To avoid interest rate risk, the bank would want to make sure that the duration of its assets is greater than the duration of its liabilities, which is known as a positive duration gap. This will help ensure that the bank earns a higher spread between the interest earned on its assets and the interest paid on its liabilities.

A Bank That Expects Interest Rates to Fall Will