An FI that is short-funded faces the risk that the return of reinvesting assets could exceed the cost of funding those assets.

Question

Quizplus · Accepted Answer

If an FI is short-funded, it means that it does not have enough funds to finance its assets, so it will have to borrow funds to invest. In this situation, the cost of funding the assets is likely to be higher than the return on the invested assets, which exposes the FI to interest rate risk. Therefore, the return of reinvesting assets is unlikely to exceed the cost of funding those assets.

An FI That Is Short-Funded Faces the Risk That the Return