If FNBNA Is Expecting a $10 Million Net Deposit Drain

question 46

Multiple Choice

If FNBNA is expecting a $10 million net deposit drain and the securities liquidity index is 0.97, by how much will pre-tax net income change if the drain is funded entirely through securities sales?

• A) -$306,122
• B) -$150,000
• C) -$375,339
• D) -$476,289
• E) -$474,490 Liquidate securities totaling 10M/0.97 = 10,309,278, losing interest income = 5.5% x 10,309,278 = 567,010, losing $309,278 on the fire sale, and gain in interest expense of 4% x 10 million core deposits = 400,000, for net total loss of $476,289.

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Definitions:

Efficient-market Hypothesis

The theory that all known information is already reflected in stock prices, making it impossible to consistently achieve higher returns than the overall market.

Security Prices

The current cost or value at which a particular security, such as stocks, bonds, or options, can be bought or sold in the market.

Empirical Validity

The extent to which a theoretical concept is supported by real-world evidence or data.

Information Processing

The acquisition, recording, organization, retrieval, display, and dissemination of information.