A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually.It has assets of $5 million with an average maturity of five years earning interest rates of 6 per cent annually.To what risk is the bank exposed?

Question

Quizplus · Accepted Answer

The bank is exposed to refinancing risk because its liabilities have a shorter maturity than its assets, and it may struggle to find new funding sources in two years when the liabilities are due. It is also exposed to interest rate risk because its assets are earning a higher interest rate than its liabilities, which means that a decrease in interest rates could negatively impact the bank's profitability. Thus, the bank is exposed to both refinancing risk and interest rate risk.

A Bank Has Liabilities of $4 Million with an Average