Professional Documents
Culture Documents
Chapter 10
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Key Topics
Nature and Functions of Investments Investment Securities Available: Advantages and Disadvantages Factors Affecting the Choice of Securities Investment Maturity Strategies Maturity Management Tools (optional reading)
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State and Local Government Obligations Nonmortgage-Related-Asset-Backed Securities Hold Relatively Few Private-Sector Securities Overall, Investment Securities Account for Less 20% of Total Assets
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Expected Rate of Return Tax Exposure Interest Rate Risk Credit Risk Business Risk
Liquidity Risk Call Risk Prepayment Risk Inflation Risk Pledging Requirements
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CPt FVn PVBond t n (1 YTM ) (1 YTM ) t 1 where CP are the annual coupon paymentson the security and where FV is the face value of the security
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Tax Exposure
The Tax Status of State and Local Government Bonds
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Many Interest Rate Risk Tools Including Futures, Options, and Swaps Exist Today
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Default Risk
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Business Risk
Risk that the Economy of the Market Area they Serve May Turn Down Security Portfolio Can Offset This Risk Securities Can be Purchased From Outside Market Area Served
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Liquidity Risk
Breadth and Depth of Secondary Market
Number of Traders on an Given Day Volume of Trades on Any Given Day
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Call Risk
Corporations and Some Governments Reserve the Right to Retire the Securities in Advance of Their Maturity
Generally Called When Interest Rates a Have Fallen Investor Must Find New Security Often with a Lower Return
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Inflation Risk
Purchasing Power from a Security or Loan May be Eroded by Rising Prices
Recently Developed Inflation Risk Hedge Treasury Inflation Protected Securities Both Coupon Payments and Principal Adjusted Annually for Inflation Based on Consumer Price Index
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Pledging Requirements
Depository Institutions Cannot Accept Federal, State and Local Government Deposits Unless Acceptable Collateral is Pledged
Generally Treasury Securities, Government Agency Securities and Selected Municipal Securities Can Be Used as Collateral
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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
Ladder policy
Front-end load
Back-end load
Barbell strategy
Rate-expectation
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