A risk a bank takes on by offering long-term fixed interest rate loans is the:
A) loss of real returns due to anticipated inflation.
B) gain that could be made from offering short-term loans.
C) loss of real returns due to an unexpected inflation surprise.
D) gains that could have been made if the money were invested in an alternative asset.
E) loss of customers wanting flexible interest loans.

Question

Quizplus · Accepted Answer

If unexpected inflation occurs, the bank will be receiving fixed interest rate payments that are worth less in real terms, leading to a loss of return.

A Risk a Bank Takes on by Offering Long-Term Fixed