In which of the following cases interest rate risk is expected to rise? 1) An insurance...

In which of the following cases interest rate risk is expected to rise?

1)	An insurance company plans to buy bonds in two months.

2)	A commercial bank plans to issue CDs in three months.

3)	A finance company has assets with a duration of six years and liabilities with a duration of 13 years.

4)	None of the above

Solutions

Expert Solution

Answer : 2) A commercial bank plans to issue CDs in three months.

Explanations :

1) An insurance company plans to buy bonds in two months. : Bond prices increase with decreasing the interest rate and vice-a-versa. So Insurance Company buying for two months means bond price increase due to deacrease in interest rate.

2) A commercial bank plans to issue CDs in three months. : A commercial bank plans to issue CDs in three months. The bank should sell a forward or futures contract to protect against an increase in interest rates. Selling a forward or futures contract commits the bank to sell (borrow) at the interest rate in the forward or futures.

3) A finance company has assets with a duration of six years and liabilities with a duration of 13 years. : The finance company should buy a forward contract to protect against decreasing interest rates that would cause the value of liabilities to increase more than the assets.

jeff jeffy answered 1 year ago

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