Which of the following statements is true?
A)An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
B)An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
C)An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities.
D)A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.

Question

Quizplus · Accepted Answer

An increase in interest rates would cause the market value of assets to decrease, especially fixed-rate securities, causing a reduction in the FI's net worth. On the other hand, liabilities that are fixed-rate would decrease less in value than liabilities with variable rates, which creates a relatively larger decline in the market value of assets than the decline in the market value of liabilities, thereby harming the FI.

Which of the Following Statements Is True