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商业银行管理 ROSE 7e 课后答案chapter_10 商业银行 管理 课后 答案 chapter_10

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精选文库 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 determining 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 Risks 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-Term 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. 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 V. Factors Affecting the Choice of Investment Securities A. Expected Rate of Return B. Tax Exposure 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. Investment 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 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 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, 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 important characteristics? 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, commercial 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 corporate 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, 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 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 generate 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 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 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 unusual 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 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 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) 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 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 expected cash inflows and its expected sale price at the end of the banks holding period. 10-9. If a government bond is expected 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 one year after purchase for a price of $970. What would this investors holding period yield be? The 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 affect investments? The 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 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 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 possible 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 was 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 borrowing 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 bonds after-tax gross yield? What after tax rate of return 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 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 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 35 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 securitys tax-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. 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 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 bonds book value, but the after-tax 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 banks current or future tax 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 banks portfolio, often at a loss, and replacing them with other securities, is usually carried out to gain additional current income, add to future income, or to minimize a banks 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, and 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 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 to meet collateralization requirements? When 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 requirements. 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 institution’s decision regarding the different maturities of securities it should hold? In 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 more fully the consequences and potential impact on earnings and risk of any particular maturity 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 firm’s investment portfolio one of the following strategies typically is chosen by most institutions: A. The Ladder or Spread-Maturity Strategy B. The Front-End Load Maturity Strategy C. The Back-End Load Maturity Strategy D. The Bar Bell Strategy E. The Rate-Expectation Approach  The ladder or spaced-maturity strategy involves 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 maximum liquidity and minimize the risk of loss due 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 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 banks security holdings at the short-end of the maturity spectrum and the rest at 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. Bacone 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 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 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 about $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 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 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 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, 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 example, a 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 before being retired. Yields to maturity on comparable-quality securities are 12 percent. What is the bond’s duration? Suppose interest rates in the market fall to 10 percent. What will be the approximate percent change in the bond’s price? Year Cash Flow Present Value Factor at 12% Present Value of Cash Flow Weight Of Each Cash Flow Duration Components 1 $100 0.893 $89.30 (89.30/950)=0.0940 0.0940 2 100 0.797 79.70 (79.70/950)=0.0839 0.1678 3 1100 0.712 783.20 (783.20/950)=0.8244 2.4733 2.7351 years Clearly the bonds duration is 2.7351 years. If interest in the market fall to 10 percent, the approximate percentage change in the bonds price will be: Percentage Change in Price = Problems 10-1. 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 expected yield to maturity? (Hint - the following relationships can help in solving for the yield: If price < par value, then yield > coupon rate; If price = par value, then yield = coupon rate; If price > par value, then yield < coupon rate.) Since the bond is selling at a premium, that is, price > 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 municipal bond is selling today for $1036.80 and has a $1,000 face (par) value. Its yield to maturity is 6 percent, and the bond promises its holders $65 per year in interest for the next 10 years. What is the bonds duration? Year Annual Interest Income PV at 6% PV of Annual Interest Time Period Recorded Time- Weighted PV 1 $ 65 0.943 61.32 x 1 = $61.32 2 $ 65 0.890 57.85 x 2 = $115.70 3 $ 65 0.840 54.58 x 3 = $163.74 4 $ 65 0.792 51.49 x 4 = $205.96 5 $ 65 0.747 48.57 x 5 = $242.85 6 $ 65 0.705 45.82 x 6 = $274.92 7 $ 65 0.665 43.23 x 7 = $302.61 8 $ 65 0.627 40.78 x 8 = $326.24 9 $ 65 0.592 38.47 x 9 = $346.23 10 $ 65 0.558 36.30 x 10 = $363.00 10 $1000 0.558 558.39 x 10 = $5583.90 $1036.80 $7986.47 Then duration = $ 7986.47 / $1036.80 = 7.703years 10-3. Calculate the yield to maturity of a 10-year U.S. Government bond that is currently selling for $1050 in

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