Is the bank exposed to interest rate increases or decreases and why?
A)Interest rate increases because the value of its assets will rise more than its liabilities.
B)Interest rate increases because the value of its assets will fall more than its liabilities.
C)Interest rate decreases because the value of its assets will rise less than its liabilities.
D)Interest rate decreases because the value of its assets will fall more than its liabilities.
E)Interest rate increases because the value of its assets will fall less than its liabilities.

Question

Quizplus · Accepted Answer

When interest rates decrease, the value of a bank's assets, such as loans, will earn less revenue, but the cost of its liabilities, such as deposits, will remain the same. Therefore, a decrease in interest rates will reduce the bank's net interest margin, which is the difference between its interest income and interest expense. As a result, the bank's profitability will be negatively affected.

Is the Bank Exposed to Interest Rate Increases or Decreases