Question

When market interest rates are expected to decline, bank management’s most likely action will be to:

a. Extend asset maturities.

b. Do nothing.

c. Increase interest-sensitive liabilities.

d. Either or both (a) and (c).

Answer 1

When market interest rates are expected to decline, bank management’s most likely action will be to extend asset maturities as it will provide them with more time to deal with asset liabilities mismatch and they will also increase the interest sensitive liabilities as their total repayments will go down and they can still deal with those liabilities for an extended period as they will have to pay less.

so When market interest rates are expected to decline , Bank management will extend asset maturities as well as increase interest sensitive liabilities.

so (d). Either or both (a) and (c).