For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets that is ______ than the _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
A) increase, greater, decrease, increase
B) increase, less, increase, decrease
C) increase, greater, increase, increase
D) decrease, greater, decrease, increase
E) decrease, less, decrease, decrease

Question

Quizplus · Accepted Answer

A positive duration gap means that the duration of assets is greater than the duration of liabilities. When interest rates decrease, the economic value of assets increases more than the economic value of liabilities, leading to an increase in the economic value of equity.

For a Bank That Has a Positive Duration Gap, a Decrease