A bank using fixed-rate liabilities to fund variable-rate assets faces the risk of interest rate ____________, and a bank using variable-rate liabilities to fund fixed-rate assets faces the risk of interest rate _____________.

Question

BlackTom AI · Accepted Answer

A bank using fixed-rate liabilities to fund variable-rate assets faces the risk of interest rates falling, and a bank using variable-rate liabilities to fund fixed-rate assets faces the risk of interest rates rising.

1. Relevant knowledge points and concepts
- Repricing or interest-rate risk: arises when the maturities or repricing times of assets and liabilities differ, causing net interest margin (NIM) to change as market rates change.
- If assets reprice faster (variable-rate assets) than liabilities (fixed-rate liabilities), the bank is asset-sensitive; if liabilities reprice faster (variable-rate liabilities) than assets (fixed-rate assets), the bank is liability-sensitive.
- Asset-sensitive institutions are harmed when rates fall; liability-sensitive institutions are harmed when rates rise.

2. Step-by-step reasoning
- Case A (fixed-rate liabilities funding variable-rate assets): liabilities’ cost remains fixed, while asset yields move with market rates. If market rates fall, variable asset yields fall but funding cost stays the same → NIM compresses. Thus the bank is exposed to falling rates.
- Case B (variable-rate liabilities funding fixed-rate assets): asset yields are fixed, but funding cost rises when market rates increase. If market rates rise, liabilities reprice upward → funding cost increases, NIM compresses. Thus the bank is exposed to rising rates.

3. Calculations with intermediate steps
- Example A: Assets yield (variable) initially 5%, liabilities fixed at 3% → NIM = 5% − 3% = 2%. If rates fall and asset yield drops to 3% → NIM = 3% − 3% = 0% (margin compressed).
- Example B: Assets fixed at 5%, liabilities variable initially 3% → NIM = 5% − 3% = 2%. If rates rise and liabilities reprice to 6% → NIM = 5% − 6% = −1% (loss on spread).

4. Why the correct answer is correct
The direction of rate movement that harms the bank corresponds to which side reprices faster. Asset-sensitive (variable assets/fixed liabilities) loses when rates fall; liability-sensitive (fixed assets/variable liabilities) loses when rates rise.

5. Why other options are incorrect
- “Rising; falling” would imply the opposite exposures and contradict repricing logic.
- “Rising; rising” or “falling; falling” ignore the asymmetric repricing behavior of assets versus liabilities and therefore misidentify which rate movement compresses margins.

6. Conclusion
Therefore the correct fill-in is: falling; rising, which matches the provided answer.

A bank using fixed-rate liabilities to fund variable-rate assets faces the risk of interest rate , and a bank using variable-rate liabilities to fund fixed-rate assets faces the risk of interest rate _.单项选择题

类似问题

The riskiness of an asset’s returns due to interest rate changes is called:

Which company's valuation is more exposed to interest rate risk, a company which owns a series of rooftop solar installations such as SunNova or SunRun or an E&P company which owns a bunch of oil and gas wells.

In this question, assume all bonds are annual coupon-ed bonds, have the face value of $1,000, have the same credit rating, and are sold at par. Which of the following has the least amount of Interest Rate Risk?

You are analyzing the exposure of U.S. banks’ income to interest rate risk using the intuitions discussed in class. In this context, you considered the statements below. Which of these statements is correct?

A firm chooses short-term finance due to uncertain future interest rates. What trade-off is it accepting?

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单

A bank using fixed-rate liabilities to fund variable-rate assets faces the risk of interest rate ____________, and a bank using variable-rate liabilities to fund fixed-rate assets faces the risk of interest rate _____________.单项选择题