If a bank has long-term fixed-rate assets and short-term liabilities, and interest rates increase over time, its net interest margin should
A) decrease
B) increase
C) stay the same.
D) either A or B, depending on whether the asset maturities exceed 10 years

Question

Quizplus · Accepted Answer

If interest rates increase over time, the cost of the bank's short-term liabilities will increase, while the yield on its long-term fixed-rate assets will remain the same. This will result in a decrease in the bank's net interest margin, as its interest income will not keep pace with its interest expense. Therefore, choice A is the best answer. Choice D is incorrect because the asset maturities exceeding 10 years is not relevant to the given scenario.

If a Bank Has Long-Term Fixed-Rate Assets and Short-Term Liabilities