For a bank that has a positive 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, greater, decrease, increase
B) increase, less, increase, decrease
C) increase, greater, increase, increase
D) decrease, less, decrease, increase
E) decrease, greater, 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 increase, the economic value of assets, which are more sensitive due to a longer duration, decreases more than the economic value of liabilities. This leads to a decrease in the economic value of equity.

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