8-92 Which of the following statements is true?
A)An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
B)An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
C)An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities.
D)A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
E)A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities.

Question

Quizplus · Accepted Answer

An increase in interest rates will generally lead to a decrease in the market value of long-term fixed-rate assets, such as bonds, and an increase in the market value of short-term floating-rate assets, such as loans. At the same time, the market value of liabilities, such as deposits, will decrease less than the market value of assets, leading to a decrease in the net worth or equity of the FI. Therefore, an increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities.

8-92 Which of the Following Statements Is True