The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

Question

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.  What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

Quizplus · Accepted Answer

The optimal transaction mentioned in the previous question is to sell a 1-year CD and buy a 2-year CD. This means that the FI will be selling a short-term asset and buying a long-term asset, which exposes it to interest rate risk. Specifically, there is the risk that interest rates will rise during the next year, which would make it more expensive for the FI to finance the purchase of the longer-term CD with the proceeds from the sale of the shorter-term CD. Therefore, the correct answer is B since this option states the risk of interest rates rising, which is the most likely risk to occur in this situation.

The Following Information Is About Current Spot Rates for Second