An interest rate increase benefits the FI by increasing the market value of the

Question

An interest rate increase benefits the FI by increasing the market value of the FI's liabilities. harms the FI by increasing the market value of the FI's liabilities. harms the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's assets. An interest rate increase benefits the FI by increasing the market value of the FI's liabilities. harms the FI by increasing the market value of the FI's liabilities. harms the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's assets. benefits the FI by increasing the market value of the FI's liabilities. harms the FI by increasing the market value of the FI's liabilities. harms the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's liabilities. benefits the FI by decreasing the market value of the FI's assets.

Explanation / Answer

When an Interest rate increases it harms the FI by decreasing the market value of the FI's Liabilities.

When there's an interest rate increase the market expectation increases which in turn increases the discounting Factor as a result the discount cash flows approach reduces the market value of the FI.

value is calculated as follows :- CF1/ (1 + Df) + CF2/ (1 + Df)2 +..... + Terminal cash flow / (1 +Df)N

hence when Df increases it reduces the value of instrument.

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