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1、CHAPTER 10 THE INVESTMENT FUNCTION IN BANKING AND FINANCIAL SERVICES MANAGEMENT Goal 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 det
2、ermining 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, Prepayment, and Other Ri
3、sks ?Investment Maturity Strategies ?Maturity Management Tools Chapter Outline I. Introduction: The Roles Performed by Investment Securities in Bank Portfolios II. Investment Instruments Available to Banks and Other Financial Firms III. Popular Money-Market Instruments A. Treasury Bills B. Short-Ter
4、m Treasury Notes and Bonds C. Federal Agency Securities D. Certificates of Deposit E. International Eurocurrency Deposits F. Bankers Acceptances G. Commercial Paper H. Short-Term Municipal Obligations IV. Popular Capital Market Instruments A. Treasury Notes and Bonds B. Municipal Notes and Bonds C.
5、Corporate Notes and Bonds III. Other Investment Instruments Developed More Recently A. Structured Notes B. Securitized Assets C. Stripped Securities IV. Investment Securities Actually Held by Banks 精选文库129 V. Factors Affecting the Choice of Investment Securities A. Expected Rate of Return B. Tax Exp
6、osure 1. The Tax Status of State and Local Government Bonds 2. Bank Qualified Bonds 3. Tax Swapping Tool 4. The Portfolio Shifting Tool C. Interest-Rate Risk D. Credit or Default Risk E. Business Risk F. Liquidity Risk G. Call Risk H. Prepayment Risk I. Inflation Risk J. Pledging Requirements VI. In
7、vestment Maturity Strategies A. The Ladder or Spaced-Maturity Policy B. The Front-End Load Maturity Policy C. The Back-End Load Maturity Policy D. The Barbell Strategy E. The Rate Expectations Approach VII. Maturity Management Tools A. The Yield Curve B. Duration VIII. Summary of the Chapter Concept
8、 Checks 10-1. Why do banks and institutions choose to devote 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
9、bank or thrift institution to diversify into different 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,
10、and aid banks in reducing their exposure to taxes. 10-2. What key roles do investments play in the management of a bank or other depository institution? See answer to 10-1 10-3. What are the principal money market and capital market instruments available to institutions today? What are their most im
11、portant characteristics? 精选文库130 精选文库131 Banks purchase a wide range of investment securities. The principal money market instruments available to banks today are Treasury bills, federal agency securities, CDs issued by other depository institutions, Eurodollar deposits, bankers acceptances, commerc
12、ial paper, and short-term municipal obligations. The common characteristics 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 co
13、rporate notes and bonds. The characteristics of these securities is 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,
14、 federal agency securities, and state and local government (municipal) 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
15、 tax sheltering, reducing overall risk exposure, a source of liquidity 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 gen
16、erate interest and principal income, that income is passed on to the holders 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 marketability 10-6. What special risks do securitized assets present to institutions investing in them? Securitized assets often c
