When a financial institution matches its interest rate-sensitive assets with its interest-sensitive liabilities:

Question

Quizplus · Accepted Answer

When a financial institution matches its interest rate-sensitive assets with its interest-sensitive liabilities, it effectively neutralizes the interest rate risk. This means that changes in interest rates will not have a significant impact on its profits as the income earned from its assets will move in tandem with the interest expenses paid on its liabilities. This is commonly referred to as "asset-liability management" and is a standard practice in the banking industry to manage interest rate risk. However, this does not necessarily mean that the institution will earn no profit, as it may still earn income from other sources such as fees or commissions.

When a Financial Institution Matches Its Interest Rate-Sensitive Assets with Its