A Bank with Long-Term Fixed-Rate Assets Funded with Short-Term Rate-Sensitive

question 60

Multiple Choice

A bank with long-term fixed-rate assets funded with short-term rate-sensitive liabilities could do which of the following to limit their interest rate risk?
I. Buy a cap.
II. Buy an interest rate swap.
III. Buy a floor.
IV. Sell an interest rate swap.

• A)I and II only
• B)III only
• C)I and IV only
• D)II and III only
• E)III and IV only

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Definitions:

Simple Rate Of Return

A calculation used to evaluate the profitability of an investment, determined by dividing the annual incremental net operating income by the initial investment cost.

Salvage Value

The expected residual worth of an asset upon the conclusion of its effective lifespan.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenue.

Incremental Cost Approach

Refers to the analysis of the additional costs that are incurred when making business decisions, focusing on the costs that change with the level of activity.