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Question

The following is an FI's balance sheet ($millions).

Notes to Balance Sheet:

Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent.

What is this bank's interest rate risk exposure, if any?

A. The bank is exposed to decreasing interest rates because it has a negative duration gap of -0.21 years.

B. The bank is exposed to increasing interest rates because it has a negative duration gap of -0.21 years.

C. The bank is exposed to increasing interest rates because it has a positive duration gap of +0.21 years.

D. The bank is exposed to decreasing interest rates because it has a positive duration gap of +0.21 years.

E. The bank is not exposed to interest rate changes since it is running a matched book.