Asked by Junwei Zheng on May 31, 2024
Verified
One way that banks can reduce the duration of their asset portfolios is through the use of
A) fixed-rate mortgages.
B) adjustable-rate mortgages.
C) certificates of deposit.
D) short-term borrowing.
Asset Portfolios
Collections of various types of investments held by individuals or institutions to diversify risk and achieve financial goals.
Duration
A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, expressed in years.
Adjustable-Rate Mortgages
A type of mortgage in which the interest rate applied to the outstanding balance varies throughout the life of the loan.
- Ascertain methods for mitigating interest-rate risk via the duration of bonds.
- Comprehend the computation and utilization of duration for immunizing bond portfolios and matching liabilities.
Verified Answer
ZK
Zybrea KnightJun 06, 2024
Final Answer :
B
Explanation :
Adjustable-rate mortgages (ARMs) allow banks to adjust the interest rates on loans in response to changes in market interest rates, thus reducing the duration of their asset portfolios by aligning the interest rates of their assets more closely with current market rates. This helps in managing interest rate risk. Fixed-rate mortgages, certificates of deposit, and short-term borrowing do not inherently adjust to market interest rates in a way that reduces the asset portfolio duration.
Learning Objectives
- Ascertain methods for mitigating interest-rate risk via the duration of bonds.
- Comprehend the computation and utilization of duration for immunizing bond portfolios and matching liabilities.