A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6 per cent annually. To what risk is the bank exposed?

Question

Quizplus · Accepted Answer

The bank is exposed to both refinancing risk and interest rate risk. Refinancing risk is the risk that the bank will not be able to roll over its liabilities at the same or lower interest rates when they mature. Interest rate risk is the risk that the value of the bank's assets will decline if interest rates rise.

A Bank Has Liabilities of $4 Million with an Average