During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.
A)increase; more rate sensitive than
B)decrease; more rate sensitive than
C)increase; equally rate sensitive as
D)decrease; equally rate sensitive as

Question

Quizplus · Accepted Answer

When a bank's liabilities are more rate sensitive than its assets during a period of rising interest rates, the cost of its liabilities (e.g., interest paid on deposits) will increase more quickly than the income from its assets (e.g., interest received from loans). This leads to a compression of the net interest margin, hence a decrease.

During a Period of Rising Interest Rates, a Bank's Net