Q:
Which of the following statements is (are) true with respect to the factors that a manager must take into account when managing the portfolios of commercial banks?
I. If interest rates are expected to rise, banks will generally lower the ratio of interest sensitive assets to interest sensitive liabilities.
II. Inflation protection is not generally needed when choosing assets for the investment portfolio.
III. The investment horizon for a bank's investment portfolio tends to be very long.
IV. With regards to the investment portfolio, liquidity is a far more important objective than asset value appreciation.
a) IV only.
b) I and III only.
c) I, III, and IV only.
d) II and IV only.
A:
The correct answer is: d)
(I) is incorrect because if interest rates are expected to rise, banks will generally "increase" the ratio of interest sensitive assets to interest sensitive liabilities. In other words, long-term bonds are issued to lock in their interest costs and at the same time, short term loans are made out so that they may be renewed at higher rates as they mature.
(II) is correct because the bank's liabilities are stated in nominal terms (ie. These liabilities will not change in accordance with inflation).
(III) is incorrect due to the fact that the investment portfolio is used to fund increases in loan demands, which can happen at any time.

RELATED FAQS

  1. A church that a registered representative (RR) attends plans to raise the funds necessary ...

    The correct answer is c) Although church bonds are normally considered to be exempt securities, the RR is obligated, by NASD ...
  2. Which of the following statements is (are) true with respect to the calculation of ...

    The correct answer is: a) (I) is incorrect because results that cover a period of less than a year must "not" be annualized. ...
  3. Which of the following terms are associated with the purchase/redemption of open-end ...

    The correct answer is b. Forward pricing is the SEC Rule that requires all transactions in open-end investment company shares ...
  4. Joanne Bume, CFA, is the head of research at large brokerage firm ...

    The correct answer is: a) The proper course of action would simply be to place Universal Airlines on a restricted list until ...
RELATED TERMS
  1. No results found.

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!