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P2.T8.20.5. Investment maturity strategies (Rose Ch.10)

Nicole Seaman

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Learning objectives: Compare various money market and capital market instruments and discuss their advantages and disadvantages. Identify and discuss various factors that affect the choice of investment securities by a bank. Apply investment maturity strategies and maturity management tools based on the yield curve and duration.


20.5.1. Which of the following is insured, at least up to some amount?

a. Treasury bills
b. Municipal bonds
c. Certificates of deposit (CD)
d. All of the above

20.5.2. If a corporation's marginal tax rate is 30.0% and it purchases an A-rated municipal bond that offers a 4.20% gross yield (aka, yield to maturity), what is the tax equivalent yield (TEY)?

a. 2.45%
b. 3.50%
c. 6.00%
d. 16.67%

20.5.3. The Acme Investment Firm wants to re-position one of its bond portfolios. Based on its in-house expertise, for the portfolio, it can select from among the following maturity strategies: Ladder Policy, Front-end Load Maturity Policy, Back-end Load Maturity Policy, Barbell Strategy, or Rate Expectations Approach. The firm's goal for the portfolio is NEITHER to maximize income NOR to seek to maximize the upside potential for earnings. Instead, the goal is to use the portfolio primarily as a source of liquidity. Given that goal, which strategy is best?

a. Ladder Policy
b. Front-end Load Maturity Policy
c. Back-end Load Maturity Policy
d. Rate Expectations Approach

Answers here:

David Harper CFA FRM

David Harper CFA FRM
Staff member
@SunnyAmazon on financial exams, the corporate tax rate is almost always just given as assumption. Older questions often assume 35.0% while our recent questions assume 21.0%; see https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States. Although there is a meaningful difference between marginal and effective, often the questions don't fret the difference and might assume these numbers for either (unless the question is about, for example, computing the effective tax rate given a schedule or rates, of course)