Chapter%208_Interest%20Rate%20Risk%20I

Chapter%208_Interest%20Rate%20Risk%20I - 1 Chapter 8...

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1 Prepared by Patty Robertson May not be used without permission Chapter 8 Interest Rate Risk I
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Interest Rate Risk 2 The risk that an interest-bearing investment will lose value if interest rates change.
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Interest Rate Risk This risk is sourced from the mismatching of the maturities of FI assets and liabilities. Asset transformation involves issuing secondary securities to invest in/purchase primary securities. Banks gather short-term deposits or borrow funds (paying short-term rates) and lend money or invest long-term (earning long-term rates). FIs make a profit on the spread: Interest Income - Interest Expense = Net Interest Income 3
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Interest Rate Risk 4 Any time interest rates change, the loan spread also changes. If the spread changes, so does the value of the asset since its
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Interest Rate Risk The FI is at risk if interest rates change. Depending on the direction interest rates move and the construction of the balance sheet, the FI is exposed from a mismatch on either side of the
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Chapter%208_Interest%20Rate%20Risk%20I - 1 Chapter 8...

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