CFA Practice Question

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CFA Practice Question

First National Bank finds itself in a situation where it is receiving fixed rate income from its loan portfolio and must pay floating rate expenses to its depositors. If interest rates rise, First National Bank will ______.

A. receive less loan income
B. receive more loan income
C. pay higher expenses to its depositors
Correct Answer: C

Since the bank's expenses to its depositors are at a floating rate, rising rates will cause these expenses to increase.

User Contributed Comments 8

User Comment
synner what's wrong with A?
nchilds No matter what the scenario, First National will be receiving a fixed loan income... However, the net amount will be less.
stefdunk actually, the net amount on the fixed loan won't be less. it's a FIXED loan
surob Good question
viannie Loan income is fixed since loan interest is fixed.
Interests paid to depositors is variable, hence rising rate, pays more interests to depositors.
zkhan87 so they'd enter into a pay fixed swap
johntan1979 Question already stated "fixed rate income"...
GBolt93 Think he meant net of fixed income - expenses to depositors.
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