If a fall in interest rates causes a bank's market value of net worth to rise,the bank must have a:
A) positive duration gap for its portfolio of assets and liabilities.
B) negative duration gap for its portfolio of assets and liabilities.
C) negative gap.
D) positive gap.

Question

Quizplus · Accepted Answer

A negative duration gap indicates that the bank's liabilities have longer maturities than its assets. When interest rates fall, the present value of the bank's liabilities decreases more than the present value of its assets. As a result, the bank's net worth increases, leading to an increase in its market value of net worth.

If a Fall in Interest Rates Causes a Bank's Market