Which one of the following conditions when combined with long-term, fixed-rate, low interest loans would tend to increase the financial risk of lending institutions the most?
A) Volatile short-term rates that are relatively low.
B) Volatile short-term rates that are relatively high.
C) Fixed short-term rates that are relatively low.
D) Volatile long-term rates that are relatively low.
E) Fixed long-term rates that are relatively low.

Question

Quizplus · Accepted Answer

Volatile short-term rates that are relatively high increase the financial risk for lending institutions the most when combined with long-term, fixed-rate, low interest loans. This is because the institutions pay more on short-term borrowings while earning less from long-term loans, squeezing their margins if short-term rates rise significantly.

Which One of the Following Conditions When Combined with Long-Term