When an FI pre-commits to lending at a fixed rate,it is exposed to
A)credit risk.
B)interest rate risk.
C)takedown risk.
D)funding risk.

Question

Quizplus · Accepted Answer

When an FI pre-commits to lending at a fixed rate, it cannot adjust its interest rate to reflect changes in the market interest rate. Any change in interest rates will affect the profitability of the lending activity, hence causing interest rate risk. Credit risk refers to the probability of default by borrowers, takedown risk refers to the uncertainty associated with the underwriting process, and funding risk refers to the probability of not being able to raise enough funds to meet contractual obligations.

When an FI Pre-Commits to Lending at a Fixed Rate,it