Duration Bank has the following assets and liabilities as of year-end. All assets and liabilities are currently priced at par and pay interest annually. Is the bank exposed to interest rate increases or decreases and why?

Select one:

A.

Interest rate increases because the value of its assets will fall more than its liabilities.

B.

Interest rate decreases because the value of its assets will fall more than its liabilities.

C.

Interest rate increases because the value of its assets will rise more than its liabilities.

D.

Interest rate increases because the value of its assets will fall less than its liabilities.

E.

Interest rate decreases because the value of its assets will rise less than its liabilities.

Assets Amount Annual Liabilities (5 millions) Rate 2-year loans $40 8 % 3-year CD 3-year loans $60 5-year term deposit Equity Total $100 Total Amount Annual ($ millions) Rate $60 7% $30 6% $10 $100 8 %