Which of the following statements is true?
A)An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
B)An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
C)An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities.
D)A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.
E)A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities.

Question

Quizplus · Accepted Answer

An increase in interest rates will cause the market value of fixed-rate assets to decrease while the value of fixed-rate liabilities will not be affected. This will lead to a decrease in the market value of assets and a decline in the net worth of the FI. Therefore, an increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities.

Which of the Following Statements Is True