Interest rate risk:
A) varies inversely with a bank's GAP.
B) can be measured by the volatility of a bank's net interest income given changes in the level of interest rates.
C) can be eliminated by matching fixed rate assets with variable rate liabilities.
D) rarely has an impact on bank earnings.
E) All of the above

Question

Quizplus · Accepted Answer

Interest rate risk can be measured by the volatility of a bank's net interest income given changes in the level of interest rates. While GAP (A) is a tool for measuring interest rate risk, it is not solely responsible for it. Matching fixed rate assets with variable rate liabilities (C) can help to mitigate interest rate risk but it cannot completely eliminate it. Interest rate risk can and does impact bank earnings (D), making it an important consideration for banks. Therefore, option B is the only correct answer to the question.

Interest Rate Risk