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#NAME?erm mortgage loans.

Question

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Financial institutions that hold fixed-rate mortgages are exposed to interest rate risk because they use short-term customer deposits to make long-term mortgage loans. If interest rates rise, the fixed-rate mortgages will be less valuable and the financial institution may experience a decrease in value or potential losses. Conversely, if interest rates fall, the fixed-rate mortgages will be more valuable, but the institution may miss out on potential higher returns from investing in higher-interest rate securities.

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