Professional Documents
Culture Documents
Function in Banking
and Financial Services
Management
Introduction
Stabilize income
Offset credit risk exposure in the loan portfolio
Provide geographic diversification
Provide a backup source of liquidity
Reduce tax exposure
Serve as collateral (pledged assets)
Help hedge against losses
Provide flexibility in a bank’s asset portfolio
Dress up the balance sheet
Written Investment Policy
A. Treasury Bills
A debt obligation of the government that, by law, must
mature within one year from date of issue. T-bills are
issued in weekly and monthly auctions and are
particularly attractive to financial firms because of their
high degree of safety.
T-bills can serve as collateral for attracting loans from
other institutions. Bills are issued and traded at a
discount from their par (face) value. Thus, the investor’s
return consists purely of price appreciation
B. Short-Term Treasury Notes and Bonds
When these securities come within one year of maturity,
they are considered money market instruments.
T-notes and bonds are coupon instruments, which means
they promise investors a fixed rate of return, though the
expected return may fall below or climb above the
promised coupon rate due to fluctuations in their market
price.
C. Federal Agency Securities
Marketable notes and bonds sold by agencies owned by
or sponsored by the federal government are known as
federal agency securities.
Familiar examples include securities issued by the
Federal National Mortgage Association, the Farm Credit
System, the Federal Home Loan Mortgage Corporation
etc.
Interest income on agency-issued notes is federally
taxable and, in most cases, subject to state and local
taxation as well
D. Certificates of Deposit
It is simply an interest-bearing receipt for the deposit of
funds in a depository institution. Thus, the primary role
of CDs is to provide depository institutions with an
additional source of funds.
Banks often buy the CDs issued by other depository
institutions, regarding them as an attractive, lower-risk
investment. CDs carry a fixed term and there is a
federally imposed penalty for early withdrawal.
CDs have negotiated interest rates that, while normally
fixed, may be allowed to fluctuate with market
conditions
E. International Eurocurrency Deposits
Eurocurrency deposits are time deposits of fixed
maturity issued by the world’s largest banks
headquartered in financial centers around the globe,
though the heart of the Eurocurrency market is in
London.
Denominated in a currency other than the home
currency of the country in which they are deposited
Most of these international deposits are of short
maturity—30, 60, or 90 days—to correspond with the
funding requirements of international trade.
F. Bankers’ Acceptances
They represent a bank’s promise to pay the holder a
designated amount of money on a designated future
date.
Most acceptances arise from a financial firm’s decision
to guarantee the credit of one of its customers who is
exporting, importing, or storing goods or purchasing
currency.
The acceptance is a discount instrument and, is always
sold at a price below par before it reaches maturity.
acceptances have a resale market, they may be traded
from one investor to another before reaching maturity.
G. Commercial Paper
• It is short-term, unsecured IOUs offered by major
corporations
the bulk of it matures in 90 days or less—and generally
is issued by borrowers with the highest credit ratings.
Most commercial paper is issued at a discount from par,
though some paper bearing a promised rate of return
(coupon) is also issued.
H. Short-Term Municipal Obligations
State and local governments issue a wide variety of
short-term debt instruments to cover temporary cash
shortages.
Two of the most common are tax-anticipation notes
(TANs), issued in lieu of expected future tax revenues,
and revenue-anticipation notes (RANs), issued to cover
expenses from special projects, such as the construction
of a toll bridge or a highway in lieu of expected
revenues from those projects
All interest earned on municipal notes is exempted from
tax
Popular Capital Market Investment
Instruments