If Rate-Sensitive Assets Equal $500 Million and Rate-Sensitive Liabilities Equals

question 38

Multiple Choice

If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals $400 million, what is the expected change in net interest income if rates increase by 1%?

• A) Net interest income will increase by $1 million.
• B) Net interest income will fall by $1 million.
• C) Net interest income will increase by $10 million.
• D) Net interest income will fall by $10 million.
• E) Net interest income will be unchanged.

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Definitions:

Interest Rate Risk

The potential for investment value fluctuations due to changes in the prevailing interest rates.

Maturity

The specified time at which the principal amount of a bond, loan, or other financial instrument is due to be paid in full.

Coupon Bond

A type of bond that pays the holder a fixed interest rate (coupon) over the bond's lifespan and repays the principal at maturity.

Yield To Maturity

The expected total yield from a bond assuming it is retained until the end of its term, accounting for all interest earnings and the return of the initial investment.