Q: Which of the following represents the most appropriate obj. found in a banks investment portfolio? a. assist w/ generating income-only profits b. assist w/generating capital-gains only profits c. assist w/ increasing after-tax income d. assist with generating municipal securities only profits Answer is C. Can someone explain better than Schweser? thanks,
i think if you define ‘investment portfolio’ that will help you understand. i believe investment portfolio is similar to prop. trading. that is, they strive to make absolute returns as this particular arm of the bank isn’t tied to a liability. double check the definiation of investment portfolio. By looking at the answers as well for this question you can basically eliminate the other three answers.
Striker, What confused me is that I thought bank’s return objective is to earn a positive interest spread (between cash deposits and loans). That led me to choose answer A “income-only profits”, earning sufficient income from loans to cover the interest paid to customers for their savings and money held at the bank institution. Does that make sense to you?! thanks,
That does make sense for the liability side. but i believe hte investment portfolio of a bank is prop. capital. That is, it differs from positive interest spread becasue it isn’t tied to a loan. Its excess capital that they have for employes to earn returns on by any means necessary.
Striker, Well, I guess it was just a badly worded question from Schweser. So what does “positive interest spread” exactly relate and apply to?
I intrepret that as the bank generally has short term liabilities (think savings accounts that a customer loans to the bank, the account is a banks liability). So the bank wants to earn more money on the savings accounts than it pays out to the owners of the savings account. This is positive interest spread.
Thank you Striker