A DI has assets of $25 million consisting of: Reserves $1 million, Securities $4 million Loans $20 million.

Its liabilities are: Core deposits $15 million, CDs $6 million, repurchase agreements $1 million, and subordinated debt $1 million. It has equity of $2 million. Increases in interest rates are expected to cause a net drain of $4 million in core deposits over the next year.

a. On average, deposits cost 2% and the average yield on securities is 4.5%. If the DI decides to sell securities to offset the expected decline in deposits, what will be the effect on net interest income and the size?

b. If the interest cost of issuing new short term debt (CDs or repurchase agreements) is expected to be 3.5%, what would be the effect on net interest income and size of the DI if the expected deposit drain is offset by an increase in these interest bearing liabilities?