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which of the following could hurt the liquidity position of a financials institution? a) selling loans...

which of the following could hurt the liquidity position of a financials institution?

a) selling loans held on the balance sheet in the secondary market

b) replacing treasuries with A-rated corporate bonds

c) issuing additional equity

d) issuing subordinated debt

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Answer #1

Issuing subordinate debt is always riskier for any financial institution as it is ranked below other forms of debt at the time of repayment of the debt in the event of liquidation or bankruptcy. In addition to that, issuing debt to other institutions will result in cash outflow and not inflow. Hence, issuing subordinated debt can hurt the liquidity position of a financial institution. Whereas, selling loans on balance sheet in the secondary market, replacing treasuries with A-rated corporate bonds, issuing additional equity will result in cash inflow rather than cash outflow.

Answer: Issuing Subordinated Debt

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