Question

Suppose all assets and liabilities can be split into two categories: fixed-rate and variable-rate. Bank profits will decline following a decrease in interest rates if the value of its:_______

a. fixed-rate assets is greater than the value of its variable-rate assets.
b. fixed-rate liabilities is greater than the value of its variable-rate liabilities.
c. fixed-rate assets is greater than the value of its fixed-rate liabilities.
d. fixed-rate assets is less than the value of its fixed-rate liabilities.

Answer 1

c. fixed-rate assets is greater than the value of its fixed-rate liabilities.

Step-by-step explanation:

In the case when the rate of interest is reduced than the profit of the bank is increased. Also this case applied when the variable rate assets is less than the variable rate liabilities or the fixed rate of the asset is more than the fixed rate liabilities as in the given case the rate of interest would fallen the interest i.e. paid out that reduce more than the reduction in the interest income

Hence, the option c is correct