chapter nine the investment function in banking and financial services management the purpose of...
TRANSCRIPT
CHAPTER NINEThe Investment Function in
Banking and Financial Services Management
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 determining what securities a financial institution should buy or sell.
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The purpose of this chapter is to discover the types of securities thatbanks acquire for their investment portfolio and to explore the factors that a bank manager should consider in determining whatsecurities a bank should buy or sell.
McGraw-Hill/IrwinBank Management and Financial Services, 6/e
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Functions of a Bank’s Security Portfolio
Stabilize the Bank’s IncomeOffset Credit RiskProvide Geographic DiversificationProvide Backup Source of LiquidityReduce Tax ExposureServe as CollateralHedge Against Interest Rate RiskProvide FlexibilityDress Up a Bank’s Balance Sheet
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Money Market Instruments Used by a Bank
Treasury BillsShort-Term Treasury Notes and BondsFederal Agency SecuritiesCertificates of DepositEurocurrency DepositsBanker’s AcceptancesCommercial PaperShort-Term Municipal Obligations
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Capital Market Instruments Used by a Bank
Treasury Notes and Bonds Over One Year to Maturity
Municipal Notes and Bonds
Corporate Notes and Bonds
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Other More Recent Investment Instruments
Structured Notes
Securitized Assets
Stripped Securities
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Investments Held By U.S. Banks2001
Types of Securities All Banks< $100
Mill.$100 Mill. To $1 Bill. > $1 Bill.
U.S. Treasuries 3.80 5.50 4.90 3.50Federal Agency 61.10 70.10 66.60 59.50State and Local Govt. 8.20 18.40 18.60 5.50Other Domestic Debt 10.90 4.80 7.30 11.90Foreign Debt 5.10 0.00 0.30 6.40Equities 1.80 1.10 1.80 1.80Total Sec. As % of TA 18.00 24.00 22.60 17.00
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Other Information About Investments By U.S. Banks, 2001
Types of Securities All Banks< $100
Mill.$100 Mill. To $1 Bill. > $1 Bill.
Maturities < 1 Year 14.70 13.40 11.80 18.30Maturities 1 to 5 Years 18.70 39.10 30.30 15.30Maturities > 5 Years 66.60 47.50 57.90 66.40Held to Maturity 8.20 19.40 15.60 6.10Available for Sale 91.80 80.60 84.40 93.90Pledged 47.00 35.80 43.00 48.50
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Factors Affecting the Choice of Securities
Expected Rate of ReturnTax ExposureInterest Rate RiskCredit RiskBusiness Risk
Liquidity RiskCall RiskPrepayment RiskInflation RiskPledging Requirements
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Investment Maturity Strategies
The Ladder or Spaced-Maturity Policy
The Front-End Load Maturity Policy
The Back-End Load Maturity Policy
The Barbell Strategy
The Rate Expectation Approach
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Maturity Management Tools
The Yield CurvePicture of How Market Interest Rates Differ Across Differing MaturitiesConstructed Most Easily with Treasury SecuritiesProvides Information About Under and Over Priced SecuritiesProvides Information About the Risk Return Trade-Off
DurationPresent Value Weighted Average Maturity of the Cash FlowsCan Be Used to Insulate the Securities From Interest Rate Changes