Question

Which of the following securities would tend to offer the lowest yield?

	A) Treasury bills
	B) BBB-rated Corporate bonds
	C) agency securities
	D) general obligation municipal bonds

Which of the following bonds grades would a U.S. bank normally be allowed to choose for their investment portfolio?

	A) AA
	B) BB
	C) CC
	D) D
	E) a, b, and c
	F) none of the above

Suppose a bank is following a passive ladder strategy in managing its investment portfolio, when interest rates are relatively high and the business cycle is near or at its peak, banks would be expected to:

	A) sell long-term securities from its investment ladder and buy short-term securities
	B) sell short term securities from its investment ladder and buy long-term securities
	C) buy new long-term securities that exceed the long end of their investment ladder
	D) reinvest any maturing securities at the long end of their investment ladder if the funds are not needed for other reasons

Answer 1

Which of the following securities would tend to offer the lowest yield?

Answer :Treasury bills (Because treasury bills are the most secure and are backed by the Federal government and also for shorter tenure. Hence T-bills have the lowest yield)

Which of the following bonds grades would a U.S. bank normally be allowed to choose for their investment portfolio?

Answer: a, b, and c (US banks can trade in the most secure AA rated bonds or choose a slightly higher risk bonds, BB or CC. They cannot invest in default or junk category D bonds)

Suppose a bank is following a passive ladder strategy in managing its investment portfolio, when interest rates are relatively high and the business cycle is near or at its peak, banks would be expected to:

Answer: sell long-term securities from its investment ladder and buy short-term securities

(Reason: Because in an increasing interest rate cycle, the bond yields increase and prices of bonds decrease. Especially, the prices of long term or long duration bonds fall the most and portfolio takes a hit. Therefore, it is suggested to sell long term bonds and buy short term securities)