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
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
a) IV only.
b) I and III only.
c) I, III, and IV only.
d) II and IV only.
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.
is correct because the bank's liabilities are stated
in nominal terms (ie. These liabilities will
not change in accordance with inflation).
is incorrect due to the fact that the investment
is used to fund increases in loan demands, which
can happen at any time.