For a bank that has a negative duration gap, an increase 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, less, increase, increase
B) increase, less, increase, decrease
C) increase, greater, increase, increase
D) decrease, less, decrease, increase
E) decrease, greater decrease, increase

Question

Quizplus · Accepted Answer

A negative duration gap indicates that liabilities have longer maturities than assets. Therefore, an increase in interest rates will cause a decrease in the economic value of assets, which is less than the decrease in the economic value of liabilities. This will result in a decrease in the economic value of equity.

For a Bank That Has a Negative Duration Gap, an Increase