The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.

Question

Quizplus · Accepted Answer

The opposite is true. The market value of a fixed-rate liability will decrease as interest rates rise, while the market value of a fixed-rate asset will increase. This is because fixed-rate liabilities lock in a lower interest rate, and as rates rise, the liability becomes less valuable compared to newly issued liabilities with higher interest rates. On the other hand, fixed-rate assets become more valuable because they are earning a higher interest rate than newly issued assets with lower rates.

The Market Value of a Fixed-Rate Liability Will Increase as Interest