Final answer:
Interest rate sensitivity examines the impact of changes in interest rates on the market value of a financial institution's net worth.
Step-by-step explanation:
The question is asking about the concept of interest rate sensitivity in the financial institution's net worth. Interest rate sensitivity refers to the extent to which the market value of a financial institution's net worth is affected by changes in interest rates.
When interest rates change, it can impact the value of loans and investments held by the financial institution, which in turn affects its net worth. If interest rates rise, the value of existing loans and investments decreases, leading to a decrease in the financial institution's net worth. Conversely, if interest rates fall, the value of existing loans and investments increases, resulting in an increase in the financial institution's net worth.
Understanding interest rate sensitivity is crucial for financial institutions as it helps them manage and mitigate risks associated with changes in interest rates. By analyzing the sensitivity of their net worth to interest rate fluctuations, financial institutions can make informed decisions and take appropriate measures to minimize potential losses and maximize profits.