CFAI Book 2-page 446 Q 9- Winthrop Bank This Q is so weird- I do not understand the logic behind the answers. Can anybody explain ?
try this http://www.analystforum.com/phorums/read.php?13,1099522,1099603#msg-1099603 Ask back if it still does not make sense
elcfa, Would you please kindly offer more tangible/clear solutions to Q9 B/C/D than those in CFAI’s solutions ? TKVM in advance !
elcfa Wrote: ------------------------------------------------------- > try this > http://www.analystforum.com/phorums/read.php?13,10 > 99522,1099603#msg-1099603 > > Ask back if it still does not make sense Thanks for the link. I looked at the explanation. It makes sense. I did not make the connection between loan portfolio and the bank’s total investment portfolio. I guess I had mental accounting in my head. THanks anyway. It is clear now.
AMC Wrote: ------------------------------------------------------- > Would you please kindly offer more tangible/clear > solutions to Q9 B/C/D than those in CFAI’s > solutions ? As derswap07 said, you need to think the investment portfolio as a counterweight/support/complement to the bank’s loan portfolio (to its customers), so for a fixed overall target for both, changes in loan portfolio necessitate opposite change in the investment portfolio. B. Loan risk higher --> investment can take higher risk. C. Less capital binding (more liquid) in loan portfolio --> Less need to provide liquidity from investment --> less liquid investment. D.More return in loan --> less return requirement from investment --> less need to take risk in investment.
For B. Should’nt it be higher loan risk mean low risk in security portfolio? please clarify
Sorry, I mean B. Loan risk standard higher --> Loan risk lower --> investment can take higher risk.
So, in this case, the maturity of securities portfolio is lowered, but does it also mean, we increase the assets’ duration to match the longer maturity of the loans now, in the context of ALM ?
sparty419 Wrote: ------------------------------------------------------- > So, in this case, the maturity of securities > portfolio is lowered, but does it also mean, we > increase the assets’ duration to match the longer > maturity of the loans now, in the context of ALM ? Remember it is the bank who GIVES OUT the loan, so the loan is on the ASSET side, not liabilities. What are the bank’s liabilities: customers bank deposits. ASSETS LIABILITIES Loan portfolio Customer deposits Invst portfolio Equities ----------------- --------------- Total assets Total liabilities + Equities So if loan portfolio duration up while total assets’ duration remains the same, the invest ment portfolio’s duration must go down. Think of investment portfolio in bank as a HEDGE for its loan portfolio, so that the total package (total assets)'s risk remains the same.
Aaaah…perfect…thanks