9-85 If Rates Do Not Change,the Balance Sheet Position That

question 58

Multiple Choice

9-85 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:

Reported Earnings

The net income that a company reports to its investors and shareholders, often found on its income statement.

Abnormal Earnings

Profits that exceed or fall short of the expected normal return for a given year or period.

Cutting Costs

Refers to actions implemented by a business to reduce expenses and improve profitability.

Abnormal Earnings Approach

A method for valuing a company's worth based on the premise that stock prices are influenced by differences between the expected and actual earnings, adjusted for the cost of capital.