A thrift makes long-term fixed-rate mortgages funded with short-term deposits and then interest rates rise. Which of the following is true?

Question

Quizplus · Accepted Answer

As interest rates rise, the cost of funding for the thrift would increase, while the interest income from fixed-rate mortgages would remain the same. This would lead to a decline in profitability for the thrift. The market value of equity may or may not increase depending on other factors. Option B and option E are incorrect as profitability would actually decline. Option D is incorrect as interest income would remain the same but the cost of funding would increase, leading to a decline in net interest income.

A Thrift Makes Long-Term Fixed-Rate Mortgages Funded with Short-Term Deposits