A) at the trough of the business cycle.
B) during periods of rapid inflation.
C) at the end of a contractionary period.
D) at the peak of the business cycle.
E) at the beginning of an expansionary period.
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A) general obligation bonds.
B) credit free bonds.
C) revenue bonds.
D) exempt bonds.
E) liquidity bonds.
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STRIPS, an acronym for Separate Trading ...View Answer
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A) Barbell maturity strategy
B) Riding the yield curve
C) Laddered maturity strategy
D) Interest maturity strategy
E) Risk maturity strategy
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A) Meeting capital requirements
B) Maintaining liquidity
C) Diversifying credit risk
D) Managing interest rate exposure
E) Preserving capital
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A) Treasury bills.
B) Eurodollar deposits.
C) commercial paper.
D) Treasury bonds.
E) bankers acceptances.
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When establishing an investment policy, ...View Answer
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A) municipal securities.
B) commercial paper.
C) Treasury securities.
D) discount window loans.
E) cash.
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C
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The Tax Reform Act of 1986 had a signifi...View Answer
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A) the difference between the yield on a zero coupon bond and the yield on a coupon bond.
B) the difference between a fixed-rate yield and a floating-rate yield.
C) the difference between the yield on new Treasury bills versus new Treasury bonds.
D) the difference between expected inflation and the current Treasury bill rate.
E) the difference between the yield on a security with options and the yield on a maturity-matched zero coupon Treasury security.
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A) upward sloping.
B) flat.
C) inverted.
D) humped.
E) none of the above
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A) Barbell maturity strategy
B) Riding the yield curve
C) Laddered maturity strategy
D) Timing maturity strategy
E) Cycle maturity strategy
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When loan demand is weak, banks may look for alternative ways to maintain their profitability. One strategy they might employ is to lengthen the maturity of their investment portfolio. This typically involves purchasing longer-term securities, such as bonds, which generally offer higher yields compared to short-term investments. While this can potentially increase the bank's returns, it also introduces several risks and potential problems:
1. Interest Rate Risk: Longer-term securities are more sensitive to changes in interest rates. If interest rates rise, the market value of these securities will fall, which can lead to capital losses for the bank if the securities are sold before maturity. This is known as interest rate risk.
2. Liquidity Risk: By investing in longer-term assets, the bank may reduce its liquidity. Long-term investments are not as easily convertible to cash without incurring a loss, especially if the market conditions are unfavorable. This can be problematic if the bank needs to quickly increase its cash holdings to meet unexpected withdrawals or other cash needs.
3. Asset-Liability Mismatch: Banks typically fund their investments with deposits, which are short-term liabilities. Lengthening the maturity of assets while having short-term liabilities can lead to an asset-liability mismatch. If depositors suddenly demand their money back, the bank may struggle to meet these demands without incurring losses from selling long-term investments prematurely.
4. Reinvestment Risk: If the bank is holding to maturity, it faces reinvestment risk, which is the risk that the proceeds from investments will have to be reinvested at a lower interest rate if rates fall. This can lead to a decrease in interest income over time.
5. Regulatory Capital Requirements: Regulatory frameworks, such as Basel III, require banks to hold a certain amount of capital against their assets. Longer-term investments might require more capital to be set aside, which can reduce the bank's ability to leverage its capital and limit its profitability.
6. Economic Outlook Uncertainty: A weak loan demand might be indicative of a broader economic downturn. In such a scenario, lengthening the maturity of the investment portfolio could lock the bank into lower-yielding assets for an extended period, potentially missing out on better opportunities if the economy recovers and interest rates increase.
In summary, while lengthening the maturity of their investment portfolio can offer higher yields in a low loan demand environment, banks must carefully manage the associated risks. Failure to do so can lead to liquidity problems, capital losses, and regulatory challenges, all of which can adversely affect the bank's financial health and stability.
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A bond's duration and convexity are both...View Answer
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A) A Hays County general obligation bond to modernize the county fire department.
B) A Lubbock County general obligation bond to build a new sewer plant.
C) A City of San Marcos general obligation bond to pay for street repairs.
D) A City of El Paso general obligation bond to pay for a new city jail.
E) A State of Texas bond to finance road repairs.
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E
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A) Barbell maturity strategy
B) Riding the yield curve
C) Laddered maturity strategy
D) Timing maturity strategy
E) Cycle maturity strategy
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