An increase in interest rates
A)increases the market value of the FI's financial assets and liabilities.
B)decreases the market value of the FI's financial assets and liabilities.
C)decreases the book value of the FI's financial assets and liabilities.
D)increases the book value of the FI's financial assets and liabilities.

Question

Quizplus · Accepted Answer

When interest rates increase, the value of fixed-rate financial assets and liabilities decreases. This is because the fixed interest rate is now lower than the market rate, making them less valuable in the market. Conversely, variable-rate assets and liabilities will increase in value since their income streams increase with higher interest rates. Therefore, an increase in interest rates will decrease the market value of the FI's financial assets and liabilities.

An Increase in Interest Rates