A Bank Has a Negative Duration Gap

question 7

Multiple Choice

A bank has a negative duration gap. Which one of the following statements is most correct?

• A)If all interest rates are projected to increase,to limit a net value decline before rates rise,the bank should increase the amount of short-term loans on the balance sheet.
• B)If all interest rates are projected to increase,to limit a net value decline before rates rise,the bank should increase the amount of short-term bonds issued by the bank.
• C)If all interest rates are projected to decrease,to limit a net value decline before rates fall,the bank should increase the amount of long-term loans on the balance sheet.
• D)If all interest rates are projected to decrease,to limit a net value decline before rates fall,the bank should increase the amount of long-term bonds issued by the bank.

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Definitions:

Annual Income

The total earnings or revenue generated by an individual or business in one fiscal year before any deductions.

Capital Projects

Large, long-term investments undertaken to create, expand, or replace a company's physical assets.

Cash Payback Period

The duration it takes for the earnings from an investment to cover the initial amount invested.

Annual Net Cash Flows

The total amount of money, including inflows minus outflows, that a business generates over one year.