If a bank had long-term fixed-rate assets and short-term liabilities, and interest rates increased over time, its net interest margin should
A)decrease.
B)increase.
C)stay the same.
D)either A or B, depending on whether the asset maturities exceed 10 years

Question

Quizplus · Accepted Answer

If a bank has long-term fixed-rate assets (such as loans) and short-term liabilities (such as deposits), an increase in interest rates over time will lead to a decrease in its net interest margin. This is because the interest rates on the bank's assets (which will have longer maturities) will be fixed and will not increase with the rise in interest rates, while the interest rates on its liabilities will increase. As a result, the bank's interest income will increase less than its interest expenses, leading to a decrease in its net interest margin. The answer is not D because the maturities of the assets do not affect the direction of the net interest margin change in this case.

If a Bank Had Long-Term Fixed-Rate Assets and Short-Term Liabilities