Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans.

Question

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Financial institutions that hold fixed-rate mortgages are exposed to interest rate risk because the interest rates on their long-term assets (mortgages) are fixed, while the cost of their short-term liabilities (customer deposits) can vary with market interest rates.

Financial Institutions That Hold Fixed-Rate Mortgages in Their Asset Portfolios