商业银行管理ROSE7e课后答案chapter_

1、.PAGE . 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 e*plore the factors that a manager should consider

2、in determining what securities a financial institution should buy or sell. Key Topics in This ChapterNature and Functions of InvestmentsInvestment Securities Available: Advantages and DisadvantagesMeasuring E*pected ReturnsTa*es, Credit, and Interest Rate RisksLiquidity, Prepayment, and Other RisksI

3、nvestment Maturity StrategiesMaturity 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.Treasury BillsB.Short-Term Treasury Notes an

4、d BondsC.Federal Agency SecuritiesD.Certificates of DepositE.International Eurocurrency DepositsF.Bankers AcceptancesG.mercial PaperH.Short-Term Municipal ObligationsIV.Popular Capital Market InstrumentsA.Treasury Notes and Bonds B.Municipal Notes and BondsC.Corporate Notes and BondsIII. Other Inves

5、tment Instruments Developed More RecentlyA.Structured NotesB.Securitized AssetsC.Stripped SecuritiesIV. Investment Securities Actually Held by BanksV. Factors Affecting the Choice of Investment SecuritiesA.E*pected Rate of ReturnB.Ta* E*posure 1.The Ta* Status of State and Local Government Bonds2.Ba

6、nk Qualified Bonds3.Ta* 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 Ladder or Spaced-Maturity PolicyB.The Front-End Load

7、 Maturity PolicyC.The Back-End Load Maturity PolicyD.The Barbell StrategyE.The Rate E*pectations ApproachVII. Maturity Management ToolsA.The Yield CurveB.Duration VIII. Summary of the ChapterConcept Checks10-1.Why do banks and institutions choose to devote a significant portion of their assets to in

8、vestment securities Investments perform many different roles that act as a necessary plement to the advantages loans provide. Investments generally have less credit risk than loans, allow the bank or thrift institution to diversify into different localities than most of its loans permit, provide add

9、itional 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 ine over the business cycle, and aid banks in reducing their e*posure to ta*es.10-2.What key roles do investments play in the management of

10、a bank or other depository institutionSee answer to 10-110-3.What are the principal money market and capital market instruments available to institutions today What are their most important characteristicsBanks purchase a wide range of investment securities. The principal money market instruments av

11、ailable to banks today are Treasury bills, federal agency securities, CDs issued by other depository institutions, Eurodollar deposits, bankers acceptances, mercial paper, and short-term municipal obligations. The mon characteristics of most these instruments is their safety and high marketability.

12、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 their long run ine potential.10-4.What types of investment securities do b

13、anks prefer the most Can you e*plain whymercial banks clearly prefer these major types of investment securities: United States Treasury securities, federal agency securities, and state and local government (municipal) bonds and notes. They hold small amounts of equities and other debt securities (ma

14、inly corporate notes and bonds). They pick these types because they are best suited to meet the objectives of a banks investment portfolio, such as ta* sheltering, reducing overall risk e*posure, a source of liquidity and naturally generating ine as well as diversifying their assets.10-5.What are se

15、curitized 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 ine, that ine is passed on to the holders of securities representing an interest in the loan pool. These loan-backed securities are

16、 attractive to many banks because of their higher yields and frequent federal guarantees (in the case, for e*ample, of most home-mortgage-backed securities) as well as their relatively high liquidity and marketability10-6.What special risks do securitized assets present to institutions investing in

17、themSecuritized 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 interest rates have fallen and new loans can be substituted for the old loans at cheaper loan rate

18、s) 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 unusual features do they containStructured notes usually are packaged investments assembled by se

19、curity dealers that offer customers fle*ible yields in order to protect their customers investments against losses due to inflation and changing interest rates. Most structured notes are based upon government or federal agency securities.Stripped securities consist of either principal payments or in

20、terest payments from a debt security. The e*pected 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 of which may be sold as a separate security maturing on the day the payment is due. Some of these str

21、ipped payments are highly sensitive to changes in interest rates.10-8.How is the e*pected yield on most bonds determinedFor most bonds, this requires the calculation of the yield to maturity (YTM) if the bond is to be held to maturity or the planned holding period yield (HPY) between point of purcha

22、se and point of sale. YTM is the e*pected rate of return on a bond held until its maturity date is reached, based on the bonds purchase price, promised interest payments, and redemption value at maturity. HPY is a rate of discount bringing the current price of a bond in line with its stream of e*pec

23、ted cash inflows and its e*pected sale price at the end of the banks holding period.10-9.If a government bond is e*pected to mature in two years and has a current price of $950, what is the bonds YTM if it has a par value of $1,000 and a promised coupon rate of 10 percent Suppose this bond is sold o

24、ne year after purchase for a price of $970. What would this investors holding period yield beThe relevant formula is:$950 = Using a financial calculator we get:YTM = 12.99% If 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 a

25、ffect investmentsThe following forms of risk affect investments: interest-rate risk, credit risk, business risk, liquidity risk, prepayment risk, call risk, and inflation risk. Interest-rate risk captures the sensitivity of the value of investments to interest-rate movements, while credit risk refle

26、cts 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 price stability and marketability of investments. Prepayment risk is specific to certain types of investments and focuses on

27、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 possible loss of purchasing power.10-11.How has the ta* e*posure of various U.S. bank security investments changed in recent yea

28、rsIn recent years, the government has treated interest ine and capital gains from most bank investments as ordinary ine for ta* purposes. In the past, only interest was treated as ordinary ine and capital gains were ta*ed at a lower rate. Ta* reform in the United States has also had a major impact o

29、n the relative attractiveness of state and local government bonds as bank investments, limiting bankers ability to deduct borrowing costs for ta* purposes when borrowing money to buy municipal securities.10-12.Suppose a corporate bond an investment officer would like to purchase for her bank has a b

30、efore-ta* yield of 8.98 percent and the bank is in the 35 percent federal ine ta* bracket. What is the bonds after-ta* gross yield What after ta* rate of return must a prospective loan generate to be petitive with the corporate bond Does a loan have some advantages for a lending institution that a c

31、orporate bond would not haveAfter-ta* Gross Yield on Corporate Bond = 8.98 %( 1 - 0.35) = 5.84%.A prospective loan must generate a parable yield to that of the bond to be petitive. However, granting a loan to a corporation may have the added advantage of bringing in additional service business for t

32、he bank that merely purchasing a corporate bond would not do. In this case the bank would accept a somewhat lower yield on the loan pared to 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-ta* return

33、 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 35 percent ta* bracket What is the ta*-equivalent gross yield (TEY) on this ta*-e*empt securityNet After-Ta* Return = (.06 - .05) + (0.35 * 0.80 * .05) = 0.024

34、or 2.4% The securitys ta*-equivalent yield in gross terms is 6 %/( 1-0.35) or 9.23%.10-14.Spiro Savings Bank currently holds a government 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. parable quality bon

35、ds are available today for a promised yield of 8 percent. What are the advantages to Spiro Savings from selling the government bond bearing a 6 percent promised yield and buying some 8 percent bondsIn this instance the bank could sell the 6-percent bonds, buy the 8 percent bonds, and e*perience an e

36、*tra 2 percent in yield. The bank would e*perience a capital loss of $1.1 million from the bonds book value, but the after-ta* loss would be only $1.1 million * (1-0.35) or $0.715 million.10-15. What is ta* swapping What is portfolio shifting Give an e*ample of eachA ta* swap involves e*changing one

37、 type of investment security for another when it is advantageous to do so in reducing the banks current or future ta* e*posure. For e*ample, the bank may sell investment securities at a loss to offset high ta*able ine on loans or to replace ta*able securities with ta*-e*empt securities. Portfolio sw

38、itching which involves selling certain securities out of a banks portfolio, often at a loss, and replacing them with other securities, is usually carried out to gain additional current ine, add to future ine, or to minimize a banks current or future ta* liability. For e*ample, the bank may shift its

39、 holdings of investment securities by selling off selected lower-yielding securities at a loss, and substituting higher-yielding securities in order to offset large amounts of loan ine.10-16.Why do depository institutions face pledging requirements when they accept government depositsPledging requir

40、ements are in place to safeguard the deposit of public funds. The first $100,000 of public deposits 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 t

41、o meet collateralization requirementsWhen a bank borrows from the discount window of its district 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 requireme

42、nts. If the bank raises funds through repurchase agreements (RPs), banks must pledge securities, 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

43、 maturities of securities it should holdIn choosing among various maturities of short-term and 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 m

44、ore fully the consequences and potential impact on earnings and risk of any particular maturity mi* of securities they choose.10-19.What maturity strategies do financial firms employ in managing their portfoliosIn choosing the maturity distribution of securities to be held in the financial firms inv

45、estment portfolio one of the following strategies typically is chosen by most institutions: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-E*pectation ApproachThe ladder or spaced-maturity strategy i

46、nvolves equally spacing out a banks security holdings over its preferred maturity range 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 ma*imum liquidity and minimize the risk of loss d

47、ue to rising interest rates. The back-end loaded maturity policy calls for placing all security holdings at the long-term end of the maturity spectrum to ma*imize potential gains if interest rates fall and to earn the highest average yields. In contrast, the bar-bell strategy places a portion of the

48、 banks security holdings at the short-end of the maturity spectrum and the rest at the longest maturities, thus providing both liquidity and ma*imum ine potential. Finally, the rate e*pectations approach calls for shifting maturities toward the short end if rates are e*pected to rise and toward the

49、long-end of the maturity scale if interest rates are e*pected to fall.10-20.Bacone National Bank has structured its investment portfolio, which e*tends 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

50、 National Bank and Trust holds $36 million on one- and two-year securities and 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 stru

51、cture of its portfolioBacone National Bank has structured its investment portfolio 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 ab

52、out $30 million in 8 and 10-year maturities, which is clearly a barbell strategy. Dunham National Bank pursues its strategy to provide both liquidity (from the short maturities) and high ine (from the long maturities), while Bacone National is a small bank that needs a simple-to-e*ecute strategy.10-

53、21.How can the yield curve and duration help an investment officer choose which securities to acquire or sellYield curves possibly provide a forecast of the future course of short-term rates, telling us what the current average e*pectation is in the market. The yield curve also provides an indicatio

54、n of equilibrium yields at varying maturities and, therefore, gives an indication if there are any significantly underpriced or overpriced securities. Finally, the yield curves shape gives the banks investment officer a measure of the yield trade-off - that is, how much yield will change, on average

55、, if a security portfolio is shortened or lengthened in maturity.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 e*ample, a

56、 loan or security with a duration of 4 years stands to lose twice 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 befo

57、re being retired. Yields to maturity on parable-quality securities are 12 percent. What is the bonds duration Suppose interest rates in the market fall to 10 percent. What will be the appro*imate percent change in the bonds priceYearCashFlowPresentValueFactorat 12%PresentValue ofCashFlowWeightOf Eac

58、h Cash FlowDurationponents1$1000.893$89.30(89.30/950)=0.09400.094021000.79779.70(79.70/950)=0.08390.1678311000.712783.20(783.20/950)=0.82442.47332.7351 yearsClearly the bonds duration is 2.7351 years. If interest in the market fall to 10 percent, the appro*imate percentage change in the bonds price

59、will be:Percentage Change in Price =Problems10-1.A 10-year U.S. Treasury bond with a par value of $1000 is currently for $1015 from various security dealers. The bond carries a 7-percent coupon rate. If purchased today and held to maturity is its e*pected yield to maturity(Hint - the following relat

60、ionships can help in solving for the yield:If price coupon rate;If price = par value, then yield = coupon rate;If price par value, then yield par value, the yield will be less than the coupon rate, or a yield 7%.The relevant formula is:$1015 = YTM = 6.79% (using a financial calculator) 10-2.A munici