THE TERM STRUCTURE OF INTEREST-RATES AND THE ASSET AND LIABILITY DECISIONS OF A FINANCIAL INTERMEDIARY

Interest rate risk management has become an important topic for managi ng financial institutions. Much of the attention devoted to the topic has focused on asset and liability choices without regard to their imp act on the value of the equity of the financial institution. In this p aper, a two-period equity valuation model is employed to investigate t he optimal asset and liability decisions. The asset and liability deci sions are shown to be a function of the slope of the yield curve, the existence of a term premium, and whether the actions of the institutio ns could result in a penalty for violation of a minimum capital-to-ass et restriction.