商业银行管理ROSE7e课后答案chapter.docx

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商业银行管理ROSE7e课后答案chapter

CHAPTER10

THEINVESTMENTFUNCTIONINBANKINGANDFINANCIALSERVICESMANAGEMENT

GoalofThisChapter:

Thepurposeofthischapteristodiscoverthetypesofsecuritiesthatfinancialinstitutionsacquirefortheirinvestmentportfolioandtoexplorethefactorsthatamanagershouldconsiderindeterminingwhatsecuritiesafinancialinstitutionshouldbuyorsell.

KeyTopicsinThisChapter

∙NatureandFunctionsofInvestments

∙InvestmentSecuritiesAvailable:

AdvantagesandDisadvantages

∙MeasuringExpectedReturns

∙Taxes,Credit,andInterestRateRisks

∙Liquidity,Prepayment,andOtherRisks

∙InvestmentMaturityStrategies

∙MaturityManagementTools

ChapterOutline

I.Introduction:

TheRolesPerformedbyInvestmentSecuritiesinBankPortfolios

II.InvestmentInstrumentsAvailabletoBanksandOtherFinancialFirms

III.PopularMoney-MarketInstruments

A.TreasuryBills

B.Short-TermTreasuryNotesandBonds

C.FederalAgencySecurities

D.CertificatesofDeposit

E.InternationalEurocurrencyDeposits

F.Bankers'Acceptances

G.CommercialPaper

H.Short-TermMunicipalObligations

IV.PopularCapitalMarketInstruments

A.TreasuryNotesandBonds

B.MunicipalNotesandBonds

C.CorporateNotesandBonds

III.OtherInvestmentInstrumentsDevelopedMoreRecently

A.StructuredNotes

B.SecuritizedAssets

C.StrippedSecurities

IV.InvestmentSecuritiesActuallyHeldbyBanks

V.FactorsAffectingtheChoiceofInvestmentSecurities

A.ExpectedRateofReturn

B.TaxExposure

1.TheTaxStatusofStateandLocalGovernmentBonds

2.BankQualifiedBonds

3.TaxSwappingTool

4.ThePortfolioShiftingTool

C.Interest-RateRisk

D.CreditorDefaultRisk

E.BusinessRisk

F.LiquidityRisk

G.CallRisk

H.PrepaymentRisk

I.InflationRisk

J.PledgingRequirements

VI.InvestmentMaturityStrategies

A.TheLadderorSpaced-MaturityPolicy

B.TheFront-EndLoadMaturityPolicy

C.TheBack-EndLoadMaturityPolicy

D.TheBarbellStrategy

E.TheRateExpectationsApproach

VII.MaturityManagementTools

A.TheYieldCurve

B.Duration

VIII.SummaryoftheChapter

ConceptChecks

10-1.Whydobanksandinstitutionschoosetodevoteasignificantportionoftheirassetstoinvestmentsecurities?

Investmentsperformmanydifferentrolesthatactasanecessarycomplementtotheadvantagesloansprovide.Investmentsgenerallyhavelesscreditriskthanloans,allowthebankorthriftinstitutiontodiversifyintodifferentlocalitiesthanmostofitsloanspermit,provideadditionalliquidreservesincasemorecashisneeded,providecollateralascalledforbylawandregulationtobackgovernmentdeposits,helptostabilizebankincomeoverthebusinesscycle,andaidbanksinreducingtheirexposuretotaxes.

10-2.Whatkeyrolesdoinvestmentsplayinthemanagementofabankorotherdepositoryinstitution?

Seeanswerto10-1

10-3.Whataretheprincipalmoneymarketandcapitalmarketinstrumentsavailabletoinstitutionstoday?

Whataretheirmostimportantcharacteristics?

Bankspurchaseawiderangeofinvestmentsecurities.TheprincipalmoneymarketinstrumentsavailabletobankstodayareTreasurybills,federalagencysecurities,CD'sissuedbyotherdepositoryinstitutions,Eurodollardeposits,bankers'acceptances,commercialpaper,andshort-termmunicipalobligations.Thecommoncharacteristicsofmosttheseinstrumentsistheirsafetyandhighmarketability.CapitalmarketinstrumentsavailabletobanksincludeTreasurynotesandbonds,stateandlocalgovernmentnotesandbonds,mortgage-backedsecurities,andcorporatenotesandbonds.Thecharacteristicsofthesesecuritiesistheirlongrunincomepotential.

10-4.Whattypesofinvestmentsecuritiesdobankspreferthemost?

Canyouexplainwhy?

Commercialbanksclearlypreferthesemajortypesofinvestmentsecurities:

UnitedStatesTreasurysecurities,federalagencysecurities,andstateandlocalgovernment（municipal）bondsandnotes.Theyholdsmallamountsofequitiesandotherdebtsecurities（mainlycorporatenotesandbonds）.Theypickthesetypesbecausetheyarebestsuitedtomeettheobjectivesofabanksinvestmentportfolio,suchastaxsheltering,reducingoverallriskexposure,asourceofliquidityandnaturallygeneratingincomeaswellasdiversifyingtheirassets.

10-5.Whataresecuritizedassets?

Whyhavetheygrownsorapidlyinrecentyears?

Securitizedassetsareloansthatareplacedinapooland,astheloansgenerateinterestandprincipalincome,thatincomeispassedontotheholdersofsecuritiesrepresentinganinterestintheloanpool.Theseloan-backedsecuritiesareattractivetomanybanksbecauseoftheirhigheryieldsandfrequentfederalguarantees（inthecase,forexample,ofmosthome-mortgage-backedsecurities）aswellastheirrelativelyhighliquidityandmarketability

10-6.Whatspecialrisksdosecuritizedassetspresenttoinstitutionsinvestinginthem?

Securitizedassetsoftencarrysubstantialinterest-rateriskandprepaymentrisk,whichariseswhencertainloansinthesecuritized-assetpoolarepaidoffearlybytheborrowers（usuallybecauseinterestrateshavefallenandnewloanscanbesubstitutedfortheoldloansatcheaperloanrates）oraredefaulted.Prepaymentriskcansignificantlydecreasethevaluesofsecuritiesbackedbyloansandchangetheireffectivematurities.

10-7.Whatarestructurednotesandstrippedsecurities?

Whatunusualfeaturesdotheycontain?

Structurednotesusuallyarepackagedinvestmentsassembledbysecuritydealersthatoffercustomersflexibleyieldsinordertoprotecttheircustomers'investmentsagainstlossesduetoinflationandchanginginterestrates.Moststructurednotesarebasedupongovernmentorfederalagencysecurities.

Strippedsecuritiesconsistofeitherprincipalpaymentsorinterestpaymentsfromadebtsecurity.TheexpectedcashflowfromaTreasurybondormortgage-backedsecurityisseparatedintoastreamofprincipalpaymentsandastreamofinterestpayments,eachofwhichmaybesoldasaseparatesecuritymaturingonthedaythepaymentisdue.Someofthesestrippedpaymentsarehighlysensitivetochangesininterestrates.

10-8.Howistheexpectedyieldonmostbondsdetermined?

Formostbonds,thisrequiresthecalculationoftheyieldtomaturity（YTM）ifthebondistobeheldtomaturityortheplannedholdingperiodyield（HPY）betweenpointofpurchaseandpointofsale.YTMistheexpectedrateofreturnonabondhelduntilitsmaturitydateisreached,basedonthebond'spurchaseprice,promisedinterestpayments,andredemptionvalueatmaturity.HPYisarateofdiscountbringingthecurrentpriceofabondinlinewithitsstreamofexpectedcashinflowsanditsexpectedsalepriceattheendofthebank'sholdingperiod.

10-9.Ifagovernmentbondisexpectedtomatureintwoyearsandhasacurrentpriceof$950,whatisthebond'sYTMifithasaparvalueof$1,000andapromisedcouponrateof10percent?

Supposethisbondissoldoneyearafterpurchaseforapriceof$970.Whatwouldthisinvestor'sholdingperiodyieldbe?

Therelevantformulais:

$950=

Usingafinancialcalculatorweget:

YTM=12.99%

Ifthebondissoldafteroneyear,theformulaentrieschangeto:

$950=

andtheYTMis:

YTM=12.63%

10-10.Whatformsofriskaffectinvestments?

Thefollowingformsofriskaffectinvestments:

interest-raterisk,creditrisk,businessrisk,liquidityrisk,prepaymentrisk,callrisk,andinflationrisk.Interest-rateriskcapturesthesensitivityofthevalueofinvestmentstointerest-ratemovements,whilecreditriskreflectstheriskofdefaultoneitherinterestorprincipalpayments.Businessriskreferstotheimpactofcreditconditionsandtheeconomy,whileliquidityriskfocusesonthepricestabilityandmarketabilityofinvestments.Prepaymentriskisspecifictocertaintypesofinvestmentsandfocusesonthefactthatsomeloanswhichthesecuritiesarebasedoncanbepaidoffearly.Callriskreferstotheearlyretirementofsecuritiesandinflationriskreferstotheirpossiblelossofpurchasingpower.

10-11.HowhasthetaxexposureofvariousU.S.banksecurityinvestmentschangedinrecentyears?

Inrecentyears,thegovernmenthastreatedinterestincomeandcapitalgainsfrommostbankinvestmentsasordinaryincomefortaxpurposes.Inthepast,onlyinterestwastreatedasordinaryincomeandcapitalgainsweretaxedatalowerrate.TaxreformintheUnitedStateshasalsohadamajorimpactontherelativeattractivenessofstateandlocalgovernmentbondsasbankinvestments,limitingbankers’abilitytodeductborrowingcostsfortaxpurposeswhenborrowingmoneytobuymunicipalsecurities.

10-12.Supposeacorporatebondaninvestmentofficerwouldliketopurchaseforherbankhasabefore-taxyieldof8.98percentandthebankisinthe35percentfederalincometaxbracket.Whatisthebond'safter-taxgrossyield?

Whataftertaxrateofreturnmustaprospectiveloangeneratetobecompetitivewiththecorporatebond?

Doesaloanhavesomeadvantagesforalendinginstitutionthatacorporatebondwouldnothave?

After-taxGrossYieldonCorporateBond=8.98%（1-0.35）=5.84%.

Aprospectiveloanmustgenerateacomparableyieldtothatofthebondtobecompetitive.However,grantingaloantoacorporationmayhavetheaddedadvantageofbringinginadditionalservicebusinessforthebankthatmerelypurchasingacorporatebondwouldnotdo.Inthiscasethebankwouldacceptasomewhatloweryieldontheloancomparedtothebondinanticipationofgettingmoretotalrevenuefromtheloanrelationshipduetothesaleofotherbankservices.

10-13.Whatisthenetafter-taxreturnonaqualifiedmunicipal