Question 2, part b The first portfolio objective specified by Ike is ‘reduce interest rate risk’. The answer shows that investing in longer term assets better matches bank liabilities. How did they get this? I am assuming that bank liabilities are short term in nature. Their duration is shorter term as well. Would I invest in short term assets to better match my liabilities? Thanks.
they are using the security portfolio to invest in teh Longer term assets to help control interest rate risk. Remember teh security portfolio is the excess funds over their required reserve and other stuff that i can’t recall off the top of my head.
i understand that part. still why the need for longer duration assets?
The question makes a statement that the banks assets re-price quicker than its liabilities. I think they are implying that the duration of liabilities is longer. In my humble opinion the two statements are not necessarily one and the same. The speed of re-pricing could be a valuation issue rather than duration issue.