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.
-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.

Question

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. 
-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.

Quizplus · Accepted Answer

To maximize returns, the FI needs to choose the option that generates a positive spread with the highest basis points. Among the given options, choice D offers the highest positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans. This means that the FI is borrowing at a lower rate than it is lending, resulting in a positive net interest margin. Thus, choice D is the best option for maximizing returns given the constraint that rates do not change.

The Following Information Is About Current Spot Rates for Second