An interest rate increase
A)benefits the FI by increasing the market value of the FI's liabilities.
B)harms the FI by increasing the market value of the FI's liabilities.
C)harms the FI by decreasing the market value of the FI's liabilities.
D)benefits the FI by decreasing the market value of the FI's liabilities.
E)benefits the FI by decreasing the market value of the FI's assets.

Question

Quizplus · Accepted Answer

An interest rate increase benefits a Financial Institution (FI) by decreasing the market value of its liabilities. This is because the present value of future payouts decreases as the discount rate (interest rate) increases, effectively reducing the amount the FI owes in today's terms.

An Interest Rate Increase