Question

QUESTION 2 The average maturity of its assets is larger than that of its deposits, as is typical of most banks. There is a reinvestment risk re-finance risk re-pricing risk default risk

that all

Answer 1

Here the right answer is Repricing risk.

Suppose we take the example of a bank. For a bank the long term loans are an asset and deposits are liability.

Suppose there is a long term loan at a fixed rate , and a short term deposit at a floating rate. The short term deposits mature at an earlier date and at that time there is an interest rate increase. So There will be a decrease in the income for the bank as it will now have to pay more interest on the deposits, and the interest it will receive on the loans are fixed. So there will be a decrease in the Net interest margin and banks will have reduced income. This is an effect of repricing risk.