商业银行管理 ROSE e 课后答案chapter

1、CHAPTER 10THE INVESTMENT FUNCTION IN BANKING AND FINANCIAL SERVICES MANAGEMENTGoal of This Chapter: The purpose of this chapter is to discover the types of securities that financial institutions acquire for their investment portfolio and to explore the factors that a manager should consider in deter

2、mining what securities a financial institution should buy or sell. Key Topics in This Chapter· Nature and Functions of Investments· Investment Securities Available: Advantages and Disadvantages· Measuring Expected Returns· Taxes, Credit, and Interest Rate Risks· Liquidity, P

3、repayment, and Other Risks· Investment Maturity Strategies· Maturity Management ToolsChapter OutlineI.Introduction:The Roles Performed by Investment Securities in Bank PortfoliosII. Investment Instruments Available to Banks and Other Financial FirmsIII.Popular Money-Market InstrumentsA.Tre

4、asury BillsB.Short-Term Treasury Notes and BondsC.Federal Agency SecuritiesD.Certificates of DepositE.International Eurocurrency DepositsF.Bankers' AcceptancesG.Commercial PaperH.Short-Term Municipal ObligationsIV.Popular Capital Market InstrumentsA.Treasury Notes and Bonds B.Municipal Notes and

5、 BondsC.Corporate Notes and BondsIII. Other Investment Instruments Developed More RecentlyA.Structured NotesB.Securitized AssetsC.Stripped SecuritiesIV. Investment Securities Actually Held by BanksV. Factors Affecting the Choice of Investment SecuritiesA.Expected Rate of ReturnB.Tax Exposure 1.The T

6、ax Status of State and Local Government Bonds2.Bank Qualified Bonds3.Tax Swapping Tool4.The Portfolio Shifting ToolC.Interest-Rate RiskD.Credit or Default RiskE.Business RiskF.Liquidity RiskG.Call RiskH.Prepayment RiskI.Inflation RiskJ.Pledging RequirementsVI. Investment Maturity StrategiesA.The Lad

7、der or Spaced-Maturity PolicyB.The Front-End Load Maturity PolicyC.The Back-End Load Maturity PolicyD.The Barbell StrategyE.The Rate Expectations ApproachVII. Maturity Management ToolsA.The Yield CurveB.Duration VIII. Summary of the ChapterConcept Checks10-1.Why do banks and institutions choose to d

8、evote a significant portion of their assets to investment securities? Investments perform many different roles that act as a necessary complement to the advantages loans provide. Investments generally have less credit risk than loans, allow the bank or thrift institution to diversify into different

9、localities than most of its loans permit, provide additional liquid reserves in case more cash is needed, provide collateral as called for by law and regulation to back government deposits, help to stabilize bank income over the business cycle, and aid banks in reducing their exposure to taxes.10-2.

10、What key roles do investments play in the management of a bank or other depository institution?See answer to 10-110-3.What are the principal money market and capital market instruments available to institutions today? What are their most important characteristics?Banks purchase a wide range of inves

11、tment securities. The principal money market instruments available to banks today are Treasury bills, federal agency securities, CD's issued by other depository institutions, Eurodollar deposits, bankers' acceptances, commercial paper, and short-term municipal obligations. The common charact

12、eristics of most these instruments is their safety and high marketability. Capital market instruments available to banks include Treasury notes and bonds, state and local government notes and bonds, mortgage-backed securities, and corporate notes and bonds. The characteristics of these securities is

13、 their long run income potential.10-4.What types of investment securities do banks prefer the most? Can you explain why?Commercial banks clearly prefer these major types of investment securities: United States Treasury securities, federal agency securities, and state and local government (municipal)

14、 bonds and notes. They hold small amounts of equities and other debt securities (mainly corporate notes and bonds). They pick these types because they are best suited to meet the objectives of a banks investment portfolio, such as tax sheltering, reducing overall risk exposure, a source of liquidity

15、 and naturally generating income as well as diversifying their assets.10-5.What are securitized assets? Why have they grown so rapidly in recent years? Securitized assets are loans that are placed in a pool and, as the loans generate interest and principal income, that income is passed on to the hol

16、ders of securities representing an interest in the loan pool. These loan-backed securities are attractive to many banks because of their higher yields and frequent federal guarantees (in the case, for example, of most home-mortgage-backed securities) as well as their relatively high liquidity and ma

17、rketability10-6.What special risks do securitized assets present to institutions investing in them?Securitized assets often carry substantial interest-rate risk and prepayment risk, which arises when certain loans in the securitized-asset pool are paid off early by the borrowers (usually because int

18、erest rates have fallen and new loans can be substituted for the old loans at cheaper loan rates) or are defaulted. Prepayment risk can significantly decrease the values of securities backed by loans and change their effective maturities.10-7.What are structured notes and stripped securities? What u

19、nusual features do they contain?Structured notes usually are packaged investments assembled by security dealers that offer customers flexible yields in order to protect their customers' investments against losses due to inflation and changing interest rates. Most structured notes are based upon

20、government or federal agency securities.Stripped securities consist of either principal payments or interest payments from a debt security. The expected cash flow from a Treasury bond or mortgage-backed security is separated into a stream of principal payments and a stream of interest payments, each

21、 of which may be sold as a separate security maturing on the day the payment is due. Some of these stripped payments are highly sensitive to changes in interest rates.10-8.How is the expected yield on most bonds determined?For most bonds, this requires the calculation of the yield to maturity (YTM)

22、if the bond is to be held to maturity or the planned holding period yield (HPY) between point of purchase and point of sale. YTM is the expected rate of return on a bond held until its maturity date is reached, based on the bond's purchase price, promised interest payments, and redemption value

23、at maturity. HPY is a rate of discount bringing the current price of a bond in line with its stream of expected cash inflows and its expected sale price at the end of the bank's holding period.10-9.If a government bond is expected to mature in two years and has a current price of $950, what is t

24、he bond's YTM if it has a par value of $1,000 and a promised coupon rate of 10 percent? Suppose this bond is sold one year after purchase for a price of $970. What would this investor's holding period yield be?The relevant formula is:$950 = Using a financial calculator we get:YTM = 12.99% If

25、 the bond is sold after one year, the formula entries change to:$950 = and the YTM is:YTM = 12.63% 10-10.What forms of risk affect investments?The following forms of risk affect investments: interest-rate risk, credit risk, business risk, liquidity risk, prepayment risk, call risk, and inflation ris

26、k. Interest-rate risk captures the sensitivity of the value of investments to interest-rate movements, while credit risk reflects the risk of default on either interest or principal payments. Business risk refers to the impact of credit conditions and the economy, while liquidity risk focuses on the

27、 price stability and marketability of investments. Prepayment risk is specific to certain types of investments and focuses on the fact that some loans which the securities are based on can be paid off early. Call risk refers to the early retirement of securities and inflation risk refers to their po

28、ssible loss of purchasing power.10-11.How has the tax exposure of various U.S. bank security investments changed in recent years?In recent years, the government has treated interest income and capital gains from most bank investments as ordinary income for tax purposes. In the past, only interest wa

29、s treated as ordinary income and capital gains were taxed at a lower rate. Tax reform in the United States has also had a major impact on the relative attractiveness of state and local government bonds as bank investments, limiting bankers ability to deduct borrowing costs for tax purposes when borr

30、owing money to buy municipal securities.10-12.Suppose a corporate bond an investment officer would like to purchase for her bank has a before-tax yield of 8.98 percent and the bank is in the 35 percent federal income tax bracket. What is the bond's after-tax gross yield? What after tax rate of r

31、eturn must a prospective loan generate to be competitive with the corporate bond? Does a loan have some advantages for a lending institution that a corporate bond would not have?After-tax Gross Yield on Corporate Bond = 8.98 %( 1 - 0.35) = 5.84%.A prospective loan must generate a comparable yield to

32、 that of the bond to be competitive. However, granting a loan to a corporation may have the added advantage of bringing in additional service business for the bank that merely purchasing a corporate bond would not do. In this case the bank would accept a somewhat lower yield on the loan compared to

33、the bond in anticipation of getting more total revenue from the loan relationship due to the sale of other bank services.10-13.What is the net after-tax return on a qualified municipal security whose nominal gross return is 6 percent, the cost of borrowed funds is 5 percent, and the bank is in the 3

34、5 percent tax bracket? What is the tax-equivalent gross yield (TEY) on this tax-exempt security?Net After-Tax Return = (.06 - .05) + (0.35 x 0.80 x .05) = 0.024 or 2.4% The security's tax-equivalent yield in gross terms is 6 %/( 1-0.35) or 9.23%.10-14.Spiro Savings Bank currently holds a governm

35、ent bond valued on the day of its purchase at $5 million, with a promised interest yield of 6-percent, whose current market value is $3.9 million. Comparable quality bonds are available today for a promised yield of 8 percent. What are the advantages to Spiro Savings from selling the government bond

36、 bearing a 6 percent promised yield and buying some 8 percent bonds?In this instance the bank could sell the 6-percent bonds, buy the 8 percent bonds, and experience an extra 2 percent in yield. The bank would experience a capital loss of $1.1 million from the bond's book value, but the after-ta

37、x loss would be only $1.1 million * (1-0.35) or $0.715 million.10-15. What is tax swapping? What is portfolio shifting? Give an example of each?A tax swap involves exchanging one type of investment security for another when it is advantageous to do so in reducing the bank's current or future tax

38、 exposure. For example, the bank may sell investment securities at a loss to offset high taxable income on loans or to replace taxable securities with tax-exempt securities. Portfolio switching which involves selling certain securities out of a bank's portfolio, often at a loss, and replacing th

39、em with other securities, is usually carried out to gain additional current income, add to future income, or to minimize a bank's current or future tax liability. For example, the bank may shift its holdings of investment securities by selling off selected lower-yielding securities at a loss, an

40、d substituting higher-yielding securities in order to offset large amounts of loan income.10-16.Why do depository institutions face pledging requirements when they accept government deposits?Pledging requirements are in place to safeguard the deposit of public funds. The first $100,000 of public dep

41、osits is covered by federal deposit insurance; the rest must be backed up by bank holdings of U.S. Treasury and federal agency securities valued at their par values.10-17.What types of securities are used to meet collateralization requirements?When a bank borrows from the discount window of its dist

42、rict Federal Reserve bank, it must pledge either federal government securities or other collateral acceptable to the Fed. Typically, banks will use U.S. Treasury securities to meet these collateral requirements. If the bank raises funds through repurchase agreements (RPs), banks must pledge securiti

43、es, typically U.S. Treasury and federal agency issues, as collateral in order to borrow at the low RP interest rate.10-18.What factors affect a financial service institutions decision regarding the different maturities of securities it should hold?In choosing among various maturities of short-term a

44、nd long-term securities to hold, the financial institution needs to carefully consider the use of two key maturity management tools - the yield curve and duration. These two tools help management understand more fully the consequences and potential impact on earnings and risk of any particular matur

45、ity mix of securities they choose.10-19.What maturity strategies do financial firms employ in managing their portfolios?In choosing the maturity distribution of securities to be held in the financial firms investment portfolio one of the following strategies typically is chosen by most institutions:

46、A.The Ladder or Spread-Maturity StrategyB.The Front-End Load Maturity StrategyC.The Back-End Load Maturity StrategyD.The Bar Bell StrategyE.The Rate-Expectation ApproachThe ladder or spaced-maturity strategy involves equally spacing out a bank's security holdings over its preferred maturity rang

47、e to stabilize investment earnings. The front-end load maturity strategy implies that a bank will pile up its security holdings into the shortest maturities to have maximum liquidity and minimize the risk of loss due to rising interest rates. The back-end loaded maturity policy calls for placing all

48、 security holdings at the long-term end of the maturity spectrum to maximize potential gains if interest rates fall and to earn the highest average yields. In contrast, the bar-bell strategy places a portion of the bank's security holdings at the short-end of the maturity spectrum and the rest a

49、t the longest maturities, thus providing both liquidity and maximum income potential. Finally, the rate expectations approach calls for shifting maturities toward the short end if rates are expected to rise and toward the long-end of the maturity scale if interest rates are expected to fall.10-20.Ba

50、cone National Bank has structured its investment portfolio, which extends out to four-year maturities, so that it holds about $11 million each in one-year, two-year, three-year and four-year securities. In contrast, Dunham National Bank and Trust holds $36 million on one- and two-year securities and

51、 about $30 million in 8- to 10-year maturities. What investment maturity strategy is each bank following? Why do you believe that each of these banks has adopted the particular strategy it has reflected in the maturity structure of its portfolio?Bacone National Bank has structured its investment por

52、tfolio to include $11 million equally in each of four one-year maturity intervals. This is clearly a spaced maturity or ladder policy. In contrast, Dunham National Bank holds $36 million in one and two-year securities and about $30 million in 8 and 10-year maturities, which is clearly a barbell stra

53、tegy. Dunham National Bank pursues its strategy to provide both liquidity (from the short maturities) and high income (from the long maturities), while Bacone National is a small bank that needs a simple-to-execute strategy.10-21.How can the yield curve and duration help an investment officer choose

54、 which securities to acquire or sell?Yield curves possibly provide a forecast of the future course of short-term rates, telling us what the current average expectation is in the market. The yield curve also provides an indication of equilibrium yields at varying maturities and, therefore, gives an i

55、ndication if there are any significantly underpriced or overpriced securities. Finally, the yield curve's shape gives the bank's investment officer a measure of the yield trade-off - that is, how much yield will change, on average, if a security portfolio is shortened or lengthened in maturi

56、ty.Duration tells a bank about the price volatility of its earning assets and liabilities due to changes in interest rates. Higher values of duration imply greater risk to the value of assets and liabilities held by a bank. For example, a loan or security with a duration of 4 years stands to lose tw

57、ice as much in terms of value for the same change in interest rates as a loan or security with a duration of 2 years.10-22.A bond currently selling for $950 based on a par value of $1,000 and promises $100 in interest for three years before being retired. Yields to maturity on comparable-quality securities are 12 percent. What is the bonds duration? Suppose interest rates in the market fall to 10 percent. What will be the approximate