A bank expects interest rates to fall with a parallel downward shift in the yield curve. What action should the bank take, if it wants to benefit from this view?
A) increase the maturity of its liabilities
B) reduce the maturity of its asset portfolio
C) runazerogap
D) lengthen the maturity of its asset portfolio

Question

Quizplus · Accepted Answer

If the bank believes interest rates will fall and there will be a parallel downward shift in the yield curve, then it should lengthen the maturity of its asset portfolio. This will allow the bank to benefit from the higher yields on longer-term assets as interest rates fall. Additionally, by lengthening the maturity of its assets, the bank can lock in a higher rate for a longer period of time, while potentially keeping its liabilities at shorter maturities to minimize interest rate risk.

A Bank Expects Interest Rates to Fall with a Parallel