If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities,it can reduce interest-rate risk with a swap which requires Second National to
A) pay a fixed rate while receiving a floating rate.
B) receive a fixed rate while paying a floating rate.
C) both receive and pay a fixed rate.
D) both receive and pay a floating rate.

Question

Quizplus · Accepted Answer

If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it means that its income would decrease more than its expenses with a decrease in interest rates. To reduce this risk, Second National Bank can enter into a swap agreement where it receives a fixed rate while paying a floating rate. This would provide certainty in income while reducing the impact of a decrease in interest rates. Option B is the correct choice as it aligns with this strategy. Option A, C, and D do not provide effective risk management for Second National Bank in this scenario.

If Second National Bank Has More Rate-Sensitive Assets Than Rate-Sensitive