The Following Information Is About Current Spot Rates for Second

question 36

Multiple Choice

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs) . All interest rates are fixed and paid annually $$\begin{array} { | c | c | } \hline \text { Assets } & \text { Liabilities } \\\hline \text { 1-year loan rate: } 7.50 \text { percent } & \text { 1-year CD rate: } 6.50 \text { percent } \\\hline \text { 2-year loan rate: } 8.15 \text { percent } & \text { 2-year CD rate: } 6.65 \text { percent } \\\hline\end{array}$$
-If rates do not change, the balance sheet position that maximizes the FI's returns is

• A)a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs.
• B)a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans.
• C)a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD.
• D)a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans.
• E)a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans.

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Definitions:

Diversified

The strategy of allocating investment across various financial instruments, industries, and other categories to mitigate risk.

Industry Classified

The categorization of companies into sectors and industries based on their primary business activities.

Common Shareholders' Equity

The portion of a company's equity that is attributable to common shares, representing the residual interest in the net assets of the company.

Return on Assets

A profitability ratio that measures how efficiently a company uses its assets to generate profit, calculated by dividing net income by total assets.