A thrift makes long-term fixed-rate mortgages funded with short-term deposits and then interest rates rise. Which of the following is true?

Question

Quizplus · Accepted Answer

A thrift with long-term fixed-rate mortgages funded with short-term deposits would face a decline in profitability if interest rates rise. This is because the institution would have to pay higher interest rates to retain deposits, while existing low-rate mortgages would cause a decline in interest income. This situation would lead to a decrease in net interest margin, and thus a decline in profitability.

A Thrift Makes Long-Term Fixed-Rate Mortgages Funded with Short-Term Deposits