If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

Question

Quizplus · Accepted Answer

If interest rates are expected to increase consistently over time, then the bank will consider allocating most of its funds to rate-sensitive assets because they will yield a higher return as interest rates rise. Option A is incorrect because if interest rates are expected to decrease, the bank will allocate funds to rate-sensitive assets only if they believe that these assets can generate a higher return than rate-insensitive assets. Option B is incorrect because if interest rates are expected to increase, then rate-sensitive assets will yield a higher return than rate-insensitive assets, so it makes little sense to allocate funds to rate-insensitive assets. Option D is incorrect because options A and B cannot both be correct.

If a Bank Expects Interest Rates to Consistently ____ Over