Which of the following is Fasle? a. A S&L with high negative asset-liability GAP

Question

Which of the following is Fasle?

a. A S&L with high negative asset-liability GAP (i.e repricing gap) might actually do weill in a recession (Hint: Think about what happens to interest rates in recession)

b. In general, commercial banks have a lower concentration of mortgage loans on their balance sheets than S&Ls

c. Other things equal, making more adjustable rate mortgages would help reduce an S&L interest rate risk

d. Credit unions do not pay federal income taxes

e. all of the above statements are true

Explanation / Answer

a. True. Since interest rates fall during recesion, it is likely that the value of debts will also decrease due to low demand.

b. True. Since, S&L specialises in savings, loans and mortgages, they might have a higher concentration of mortgage loans in their balancesheets.

c. False. Adjustable rate mortgages are volatile compared to fixed rate mortgages. Their interest rates will change as per market trend. Borrowers tend to borrow larger amounts when interest rates fall but in few years the rates double up leading to deeper trouble for investor. They are not very popular among borrowers for this reason.

d. True. Since credit unions pay a variety of other types of taxes such as sales and emplyment tax, they enjoy exemption from corporate income tax

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