If the maturity of a bank's assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, the bank may ________.

Question

Quizplus · Accepted Answer

If the maturity of a bank's assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, it should prefer to invest in variable-rate assets. This is because variable-rate assets have interest rates that are periodically adjusted based on changes in prevailing market conditions, which helps the bank to better manage its interest rate risk. Additionally, variable-rate assets tend to have shorter maturities, which helps to reduce the maturity gap between the bank's assets and liabilities.

If the Maturity of a Bank's Assets Is Much Longer