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?
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.
If your interest rate is lowered, the total cost of your loan could go down as a result. There is the potential to cut costs in the following ways: When compared to fixed interest rates, floating interest rates are often offered by the same institution at a 1–2.5 percentage point reduction. Because the interest rate is now lower, you may be able to reduce the amount of money you need to put toward your EMI each month. Because fixed-rate loans typically entail more rigorous pre-payment penalties, firms that are experiencing rapid growth may find that purchasing products with variable interest rates is the preferable choice. This indicates that a business owner who pays off a loan before the term could end up spending more money on fees and other charges rather than investing the money they saved in the expansion of their company.
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