Consider the following statements about interest rate risk assuming that banks have assets with longer maturities than liabilities. Which of the following statements are CORRECT?Bank assets are generally more interest rate sensitive than liabilities so they are subject to greater duration risk.Gap management is used by banks to limit the gap between asset and liabilities duration and hence remove interest risk on and off their balance sheet.Banks may engage in gap management by securitising parts of their loan portfolio, thereby shifting interest rate risk to institutional investors purchasing the securitised packages.Banks may use floating or variable rate mortgages to reduce the duration of their asset portfolio. Chose 1 option from:I, III and IV.I, II and III.I, II, III and IV.II, III and IV.I and IV.

If your interest rate is lowered, the total cost of your loan could go down as a result. There is…

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Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter25: Money, Banking, And The Federal Reserve System

Section: Chapter Questions

Problem 5P

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Consider the following statements about interest rate risk assuming that banks have assets with longer maturities than liabilities. Which of the following statements are CORRECT?

Bank assets are generally more interest rate sensitive than liabilities so they are subject to greater duration risk.
Gap management is used by banks to limit the gap between asset and liabilities duration and hence remove interest risk on and off their balance sheet.
Banks may engage in gap management by securitising parts of their loan portfolio, thereby shifting interest rate risk to institutional investors purchasing the securitised packages.
Banks may use floating or variable rate mortgages to reduce the duration of their asset portfolio.

Chose 1 option from:

I, III and IV.

I, II and III.

I, II, III and IV.

II, III and IV.

I and IV.

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