Question

If a bank is exposed to refinancing risk, its profitability is higher if interest rates __________________...

If a bank is exposed to refinancing risk, its profitability is higher if interest rates __________________ and if it is exposed to reinvestment risk, its profitability is higher if interest rates ________________.

Group of answer choices

rise; stay the same

rise; rise

fall; rise

rise; fall

fall; fall

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Answer #1

If a bank is exposed to refinancing risk, its profitability is higher if interest rates rise and if it is exposed to reinvestment risk, its profitability is higher if interest rates rise

Refinancing refers to replacing the the old loan with the new loan . So if new loans are taken a lower interest rates it will lead to lesser interest income for the banks and lesser profitability so higher interest rates will ensure higher profitability in case of refinancing risk.

Reinvestment risk refers to the risk of investing the funds at lower interest rate. But if the market interest rate increases the funds can be reinvested at higher rates and will lead to higher profitability income

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