A Bank Expects Interest Rates to Fall with a Parallel

question 106

Multiple Choice

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

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Definitions:

Liquidity

Measures the ease with which an asset can be converted into cash without significantly affecting its price.

Speculative Motive

The need to hold cash to take advantage of additional investment opportunities, such as bargain purchases.

Liquidity

The ability of an asset to be converted into cash quickly and without any significant loss in value.

Cyclical Activities

Economic or business activities that are affected by the ups and downs of the economy, showing a tendency to rise and fall in response to economic cycles.