If a financial organisation has a positive repricing gap,what happens if managers do not take action when interest rates decline?
A) Interest-sensitive liability costs stabilise
B) Interest-sensitive assets returns decline
C) The rate differential on the repricing gap remains unaffected
D) Expected pre-tax profits will not change, as the cost of interest-sensitive liabilities will decrease

Question

Quizplus · Accepted Answer

If managers do not take action when interest rates decline, the interest-sensitive assets returns will decline. This is because the revenue generated from the assets will be lower whereas interest-sensitive liability costs stabilise, meaning the costs will not decrease as much as the revenue. The rate differential on the repricing gap remains unaffected, but the expected pre-tax profits will decrease due to the lower revenue from interest-sensitive assets.

If a Financial Organisation Has a Positive Repricing Gap,what Happens