As an example of the balance sheet effect, if rates rise, Delta Bank can expect:
A.
Its fixed rate assets to increase in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.
B.
Its fixed rate assets to drop in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.
C.
Its fixed rate assets to increase in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.
D.
Its fixed rate assets to drop in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.
The Answer Is:
B
This question includes an explanation.
Explanation:
When interest rates rise, the value of fixed-rate assets held by a bank, such as bonds, will typically decrease because newer bonds will offer higher yields. However, the value of fixed-rate liabilities, such as fixed-rate deposits or debt, will also decrease. This decrease in liabilities can offset the drop in asset values to some extent, stabilizing the bank's balance sheet.
[References:No specific reference found in the document for this question. The provided answer is based on standard financial principles related to interest rate risk and balance sheet effects., ]
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