8-52 An increase in interest rates
A)increases the market value of the FI's financial assets and liabilities.
B)decreases the market value of the FI's financial assets and liabilities.
C)decreases the book value of the FI's financial assets and liabilities.
D)increases the book value of the FI's financial assets and liabilities.
E)has no impact on the market value of the FI's financial assets and liabilities.

Question

Quizplus · Accepted Answer

An increase in interest rates decreases the market value of the FI's financial assets and liabilities due to the inverse relationship between interest rates and bond prices. As interest rates increase, the present value of the FI's fixed-rate financial assets decreases, leading to a decrease in market value. Similarly, the present value of the FI's fixed-rate financial liabilities increases, leading to a decrease in market value.

8-52 an Increase in Interest Rates