Ch_16_Investment

Ch_16_Investment - Managing the Investment Portfolio 11...

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Managing the Investment Portfolio 11
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Managing the Investment n Most banks concentrate their asset management efforts on loans n Managing investment securities is typically a secondary role, especially at smaller banks n Historically, small banks have purchased securities and held them to maturity 22
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Managing the Investment n Large banks, in contrast, not only buy securities for their own portfolios, but they also: n Manage a securities trading account n Manage an underwriting subsidiary that helps municipalities issue debt in the money and capital markets 33
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Managing the Investment n Historically, bank regulators have limited the risk associated with banks owning securities by generally: n Prohibiting banks from purchasing common stock (for income purposes) n Limiting debt instruments to investment grade securities n Increasingly, banks are pursuing active strategies in managing investments in the search for higher 44
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Dealer Operations and the n When banks purchase securities, they must indicate the underlying objective for accounting purposes: n Held-to-Maturity n Trading n Available-for-Sale 55
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Dealer Operations and the n Held to Maturity: n Securities purchased with the intent and ability to hold to final maturity n Carried at historical (amortized) cost on the balance sheet n Unrealized gains and losses have no impact on the income statement 66
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Dealer Operations and the n Trading: n Securities purchased with the intent to sell them in the near term n Carried at market value on the balance sheet with unrealized gains and losses included in income 77
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Dealer Operations and the n Available for Sale: n Securities that are not classified as either held-to-maturity securities or trading securities n Carried at market value on the balance sheet with unrealized gains and losses included as a component of stockholders’ equity 88
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Dealer Operations and the n Banks perform three basic functions within their trading activities: n Offer investment advice and assistance to customers managing their own portfolios n Maintain an inventory of securities for possible sale to investors n Their willingness to buy and sell securities is called making a market n Traders speculate on short-term interest rate movements by taking 99
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Dealer Operations and the n Banks earn profits from their trading activities in several ways: n When making a market, they price securities at an expected positive spread n Bid § Price the dealer is willing to pay n Ask § Price the dealer is willing to sell n Traders can also earn profits if they correctly anticipate interest rate 1010
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Objectives of the Investment n A bank’s investment portfolio differs markedly from a trading account n Objectives of the Investment Portfolio n Safety or preservation of capital n Liquidity n Yield n Credit risk diversification n Help in manage interest rate risk exposure n Assist in meeting pledging requirements 1111
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Objectives of the Investment n Accounting for Investment Securities n FASB 115 requires security holdings to
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Ch_16_Investment - Managing the Investment Portfolio 11...

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