If a bank has assets with the same time to maturity as its liabilities, then
A)the interest rate on assets changes faster than the interest rate on liabilities.
B)the interest rate on liabilities changes faster than the interest rate on assets.
C)changes in interest rates will not affect the bank's overall portfolio.
D)changes in interest rates puts the bank at a high risk of default.

Question

Quizplus · Accepted Answer

If a bank has assets with the same time to maturity as its liabilities, changes in interest rates will not affect the bank's overall portfolio because both assets and liabilities will reprice at the same time and at the same rate. This is called interest rate matching or asset-liability management. Thus, the bank can better manage interest rate risk and reduce the likelihood of default.

If a Bank Has Assets with the Same Time to Maturity