In year one,a bank facing reinvestment risk earns 11 percent on its assets and pays 10 percent on its liabilities. In year two,the bank had a negative profit spread of 100 basis points. Which of the following is true? In year two,

Question

Quizplus · Accepted Answer

A negative profit spread of 100 basis points means that the bank's cost of funds (10%) exceeded its yield on assets (9%). For this to happen, interest rates would have to fall by 100 basis points between year one and year two. Therefore, the correct answer is (C) rates fell 100 basis points.

In Year One,a Bank Facing Reinvestment Risk Earns 11 Percent