Question

A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if _______________________.'

Answer 1

Answer: Interest rate rises

Explanation:

When interest rates rises, or move up cost of borrowing becomes higher and expensive. This results in the demand for lower-yield bonds dropping, which causes their prices to drop.

A decrease in interest rates will always lead to investors moving money from the bond market to the equity market, which results in the rise or influx of new capital. This puts the banks market value of equity at a disadvantage.