13/12/2014
Investments perform a number of vital functions in the asset portfolios of
financial firms, providing income, liquidity, diversification, and shelter for
at least a portion of earnings from taxation. Investments also tend to
stabilize earnings, providing supplemental income when other sources of
revenue are in decline.
Principal roles of investments in securities:
a. Stabilize income
b. Offset credit risk exposure in the loan portfolio
c. Provide geographical diversification
d. Provide a backup source of liqudity
e. Reduce tax exposure, especially in offsetting taxable loan revenues
f. Serve as collateral to secure federal, state, and local government
deposits held by a depository institution.
g. Help hedge against losses due to changing interest rates
h. Provide flexibility in a financial firms asset portfolio because
investment securities, unlike many loans, can be bought or sold quickly
to restructure assets
i. Dress up the balance sheet and make a financial institution look
financially stronger due to the high quality of many marketable
securities
To examine the different investment vehicles available it is useful to divide
them into two broaden groups:
Money market Instruments maturity within one year, low risk
and ready marketability
Capital market instruments remaining maturity beyond one
year, generally noted for their higher expected rate of return and
capital gains potencial
Investments held by depository institutions literally stand between
cash, loans, and deposits. When cash is low, some investments will be
sold in order to raise more cash. On the other hand, if cash is too high,
some of the excess will be placed in investment securities.
If loan demand is weak, investments wil, rise in order to provide
more earning assets and maintain profitability. But, if demand is strong,
some investments will be sold to accommodate the heavy loan demand.
Finally, when deposits are not growing fast enough, some
investment securities will be used as collateral to borrow nondeposit
funds. No other accound on the balance sheet occupies such a critical
intersection as do investments.
Money Market Investment Instruments:
1. Treasury Bills
Readily marketable; serve as collateral; traded at a discount from their
par value. Investors return consists purely of price appreciation as the bill
approaches to maturity.
2. Short-term Treasury Notes and Bonds
T-notes and T-bonds have long original maturities: 1 to 10 years for notes
and over 10 years to bonds. Quando esto 1 ano do vencimento so MM
instruments.
They are more sensitive to interest rate risk and less marketable as TBills, however their expected return are usually higher with greater
potential for capital gains. T-notes and bonds are COUPON INSTRUMENTS,
while they promise investors a fixed return rate due to fluctuations in
market price.
All negotiable Treasury Department securities are issued by electronic
book entry. This system, known as Treasury Direct, provides investment
security owners of US Treasury securities with a statement showing the
bills, notes, and bolds they hold. Earnings and Principal payments are
deposited directly into the owners checking or savings account.
3. Federal Agency Securities
Marketable notes and bonds sold by agencies owned by or sponsored by
the federal government are knwo as deferal agency securities. Familiar
examples include securities issued by the Federal National Mortgage
Association (Fannie Mae), FCS (Farm Credit System), Federal Land Banks,
and the Freddie Mac. Most of these instruments are not formally
guaranteed by the federal government, though many believe Congress
would rescue an agency in trouble. This implied government support
keeps agency yields close to those on Treasury securities and contributes
to the high liquidity of many agency securities. Interest income is
federally taxable and , in most cases, subject to state and local taxation
as well.
4. Certificates of Deposit (CDs)
A CD is simply an interest-bearing receipt for the deposit of funds in a
depository institution. The primary role of CDs is to provide depository
institutions with an additional source of funds. CDs carry a fixed term and
a penalty for early withdrawal. Jumbo os negotiable CDs bigger than
consumer oriented. CDs have negotiated interest rates that, while
normally fixed, may fluctuate with market conditions.
5. International Eurocurrency Deposits
Time deposits of fixed maturity issued in million-dollar units by the worlds
largest banks headquartered in financial centers around the globe, though
the heart of the Eurocurrency markets is in London.
Short maturity: 30,60 or 90 days
Arent insured
Slightly higher market yields due to their perceived higher credit risk.
6. Bankers acceptances
Are considered to be among the safest of all money market instruments.
The financial firm issuing the credit guarantee agrees to be the primary
obligor, committed to paying off a customers debt in return for a fee.
Is a discount instrument, therefore, is sold at a price below par. The
expected return comes from the prospect that the acceptance will rise in
price as it gets closer to maturity.
Normally cannot exceed six months to maturity,
must arise from the export or import of goods or from the storage of
marketable commodities.
7. Commercial Paper
Short term the bulk of it matures in 90 days or less
Unsecured IOUs offered by major corporations
Generally issued by borrowers with the highest credit ratings
European papers generally carries longer maturities and higher interest
rates, due to its greater perceived Credit Risk; however, there is a more
active resale market for Europaper than for most US paper issues.
8. Short-term Municipal Obligations
Securities issued in lieu of future tax revenues (TAX tax antecipation
notes) and to cover expenses from special projects (RAN revenues
anticipation notes).
All interest earned is exempt from US federal income taxation.
Treasury Notes and Bonds
Municipal Notes and bonds
Corporate Notes and Bonds
Structured Notes
Securitized Assets
Stripped securities
