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In a rising market interest rate environment, bank managements most likely action will be to: a. Decrease interest-sensitive

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Answer #1

1. Correct Answer: C

Interest-rate assets become more profitable in a rising market interest rate environment. There is a positive impact on the bank's profit due to increase in the interest-rate, thus impacting the interest rate gap in the bank's favour. Therefore, a favourable strategy for the bank would be to increase interest-sensitive assets.

2. Correct Answer: D

A bank being liability-sensitive means that there is an asset-liability mismatch. The liabilities rest faster than the assets and assets are locked down for a higher period, meaning the profitability of the bank will be reversely proportional to the interest rates; thus making a positive impact on net-interest income if interest rates fall or a negative impact on net-interest income if interest rates rise.

3. Correct Answer: C

A negative relative IS Gap suggests that the institution is liability sensitive. Therefore, having a negative interest-sensitive ratio. Liability sensitivity is explained in the above explaination for Qsn. No. 2.

4. Correct Answer: D

A bank having positive gap suggests that interest rate sensitive assets > interest rate sensitive liabilities. Therefore, the relative IS GAP > 1.

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