If a bank that relies heavily on short-term deposits expects interest rates to consistently decrease over time, it would allocate most of its loans with ____ rates if it desires to maximize its expected returns. It could reduce its exposure to interest rate risk by setting ____ rates on its loans.

Question

Quizplus · Accepted Answer

If interest rates are expected to decrease, the bank would maximize returns by offering fixed-rate loans, locking in higher rates. To reduce interest rate risk, it would set variable rates, allowing adjustments as rates change.

If a Bank That Relies Heavily on Short-Term Deposits Expects