Which one of the following statements about interest rate movements is true?
A) An upward parallel shift of interest rates will cause a loss of income if the rate-sensitivity of a bank's liabilities is higher than the rate-sensitivity of its assets.
B) A bank will lose income if it has more rate-sensitive liabilities than rate-sensitive assets.
C) Falling interest rates will always result in mark-to-market profits on short positions in fixed rate securities.
D) Rising interest rates can result in mark-to-market losses on fixed-rate assets.

Question

Quizplus · Accepted Answer

When interest rates rise, the value of fixed-rate assets decreases, resulting in mark-to-market losses. Therefore, option D is correct. Option A is incorrect because a bank would actually benefit if the rate-sensitivity of its assets was higher than that of its liabilities if interest rates were increasing, as the value of its assets would increase more than the value of its liabilities. Option B is incorrect because having more rate-sensitive liabilities would benefit the bank if interest rates were decreasing, as the cost of its liabilities would decline more than the interest earned on its assets. Option C is incorrect because mark-to-market profits cannot be guaranteed in any market condition and depend on multiple factors.

Which One of the Following Statements About Interest Rate Movements