2. CHAPTER NINE The Investment Function in Banking and Financial Services Management
The purpose of this chapter is to discover the types of securities that financial institutions acquire for their investment portfolio and to explore the factors that a manager should consider in determining what securities a financial institution should buy or sell.

3. The purpose of this chapter is to discover the types of securities that
banks acquire for their investment portfolio and to explore the
factors that a bank manager should consider in determining what
securities a bank should buy or sell.

4. Functions of a Bank’s Security Portfolio
Stabilize the Bank’s Income
Offset Credit Risk
Provide Geographic Diversification
Provide Backup Source of Liquidity
Reduce Tax Exposure
Serve as Collateral
Hedge Against Interest Rate Risk
Provide Flexibility
Dress Up a Bank’s Balance Sheet

5. Money Market Instruments Used by a Bank
Treasury Bills
Short-Term Treasury Notes and Bonds
Federal Agency Securities
Certificates of Deposit
Eurocurrency Deposits
Banker’s Acceptances
Commercial Paper
Short-Term Municipal Obligations

6. Capital Market Instruments Used by a Bank
Treasury Notes and Bonds Over One Year to Maturity
Municipal Notes and Bonds
Corporate Notes and Bonds

7. Other More Recent Investment Instruments
Structured Notes
Securitized Assets
Stripped Securities

8. Investments Held By U.S. Banks 2001

9. Other Information About Investments By U.S. Banks, 2001

10. Factors Affecting the Choice of Securities
Expected Rate of Return
Tax Exposure
Interest Rate Risk
Credit Risk
Business Risk
Liquidity Risk
Call Risk
Prepayment Risk
Inflation Risk
Pledging Requirements

11. Investment Maturity Strategies
The Ladder or Spaced-Maturity Policy
The Front-End Load Maturity Policy
The Back-End Load Maturity Policy
The Barbell Strategy
The Rate Expectation Approach

12. Maturity Management Tools
The Yield Curve
Picture of How Market Interest Rates Differ Across Differing Maturities
Constructed Most Easily with Treasury Securities
Provides Information About Under and Over Priced Securities
Provides Information About the Risk Return Trade-Off
Duration
Present Value Weighted Average Maturity of the Cash Flows
Can Be Used to Insulate the Securities From Interest Rate Changes