Is the bank exposed to interest rate increases or decreases and why?
A)Interest rate increases because the value of its assets will rise more than its liabilities.
B)Interest rate increases because the value of its assets will fall more than its liabilities.
C)Interest rate decreases because the value of its assets will rise less than its liabilities.
D)Interest rate decreases because the value of its assets will fall more than its liabilities.
E)Interest rate increases because the value of its assets will fall less than its liabilities.
[Refer to: 8-113]

Question

Quizplus · Accepted Answer

If interest rates decrease, the bank's assets will decrease in value more than its liabilities, causing a negative impact on the bank's overall financial position. This is because the bank's liabilities may have lower interest rates compared to its assets, which may have longer-term maturity durations. Therefore, the bank is exposed to interest rate decreases.

Is the Bank Exposed to Interest Rate Increases or Decreases