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LOS j: Formulate an investment policy statement for a foundation, an endowment, an insurance company, and a bank.
Q1. Ranjana Clarkson, CFA, has just been hired by First National American (FNA), a small Midwestern U.S. bank. FNA is located in a town with a population of 50,000, adjacent to a large U.S Army installation. Other than the military base, the economy of the area is primarily agricultural. Beef cattle, wheat, and corn are the mainstay products.
Clarkson, originally from India, is married to a career military officer, hence she must relocate every few years. Despite her lack of banking experience, her supervisor was impressed with Clarkson’s investment expertise and prior work as an equity analyst and portfolio manager. He was anxious to hire someone with her credentials - a rarity in such a small community. Clarkson feels confident that she can make the transition to banking, but knows she needs to learn a lot more about the specifics of the industry, particularly with regard to how their securities portfolios are managed.
As part of her review process, Clarkson begins to assemble a notebook with pertinent information. Her progress so far is detailed below:
Figure 1: Objectives and Constraints
1. Earn a positive interest spread
2. Below average tolerance for risk
3. Contain liquid assets
4. Short to intermediate term time horizon
5. Highly regulated legal environment
6. Taxable
Figure 2: Management Approaches
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Approach |
Description |
|
Ladder Strategy |
Ladder investments, weighting them long or short depending upon interest rate outlook. |
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Barbell Strategy |
Invest equal amounts on both the short and long ends of the maturity spectrum. |
|
Bullet Strategy |
Concentrates the maturities of the bonds in the portfolio around a single point on the yield curve. |
Clarkson believes that the Federal Reserve will be raising interest rates regularly over next two years in an attempt to slow an overheating economy. She is considering how the bank could take advantage of that scenario, when her boss, Jason Anderman, stops by to see how she is coming along.
“I’ve been refreshing my memory about both the portfolio management process for banks and the accounting classifications mandated by FAS 115 for securities in a bank’s portfolio”, says Clarkson. “I seem to recall that unrealized gains and losses on available-for-sale (AFS) holdings show up in the balance sheet and the income statement. That’s why it’s so important to use highly liquid and shorter-duration securities.”
Anderman responds, “I thought that unrealized gains or losses were not reported either in the income statement or the balance sheet. Why don’t you chat with our Chief Financial Officer to verify that? We can discuss it again tomorrow at our morning staff meeting.”
The lowest priority use of a bank’s funds is for:
A) reserve requirements.
B) liquidity for depositor withdrawals.
C) investing in securities.
Q2. Of the items shown in Figure One of Clarkson’s notebook which is the most important objective for a bank?
A) Item 2.
B) Item 3.
C) Item 1.
Q3. With respect to the descriptions of the three portfolio management approaches detailed in Figure Two of Clarkson’s notebook:
A) ladder is incorrect; barbell is correct; bullet is correct.
B) ladder is incorrect; barbell is incorrect; bullet is incorrect.
C) ladder is incorrect; barbell is incorrect; bullet is correct.
Q4. To make an aggressive bet on the interest rate environment that Clarkson anticipates, she should use a:
A) barbell approach and under-weight investments in short-term securities.
B) bullet strategy and over-weight investments in short-term securities.
C) ladder approach and over-weight investments in short-term securities.
Q5. Regarding their statements about a bank’s securities that have been classified as available-for-sale:
A) Clarkson is incorrect; Anderman is incorrect.
B) Clarkson is correct; Anderman is incorrect.
C) Clarkson is incorrect; Anderman is correct.
Q6. Which of the following statements about hold-to-maturity (HTM) securities held in a bank’s portfolio is FALSE? HTM securities:
A) can become available for sale to meet unforeseen liquidity needs.
B) do not report unrealized gains or losses on either the balance sheet or the income statement.
C) can become available for sale if substantial credit deterioration occurs.
Q7. Which of the following is the most appropriate return objective for a private foundation that has been established to provide support in perpetuity?
A) The long-term treasury bond return plus inflation.
B) 5.3% of assets plus expected inflation.
C) The market return plus expected inflation.
Q8. The Carraway Endowment Fund was originally established to contribute to the support of the operations of Carraway Medical Center in the United States. The Carraway Fund currently has assets of $50 million, and the fund’s asset allocation at the end of 2001 is shown in the table below. In mid-2002, the Carraway Medical Center opened research facilities in Germany and Singapore. As a result of the expansion, the annual spending rate of the Carraway Fund was increased from 3.5% to 5.2% of total assets, and 30% of the fund’s annual payout was allocated to the new facilities. Support for the new operations must be provided in local currencies. Inflation is expected to be 3.0% during each of the next several years.
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Carraway Endowment Fund Asset Allocation, 2001 |
|
Asset Class |
Current Allocation (%, US$) |
Expected Returns (%) |
|
Cash |
2.0 |
2.0 |
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U. S. bonds |
33.0 |
6.5 |
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International bonds |
0.0 |
7.0 |
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U.S. equities |
60.0 |
9.5 |
|
International equities |
5.0 |
9.0 |
The most appropriate return objective for the Carraway Endowment Funds is closest to which of the following?
A) 8.2%.
B) 5.2%.
C) 8.7%.
Q9. Which of the following most appropriately addresses the Carraway Fund’s allocation to cash? Endowment funds:
A) typically have low liquidity needs. Therefore, a 2.0% allocation to cash is excessive.
B) typically have low liquidity needs. Therefore, a 2.0% allocation to cash should be sufficient to cover operating expenses.
C) often have high liquidity needs. Therefore, a 10% allocation to cash may be necessary to cover operating expenses and unexpected liquidity needs.
Q10. Which of the following most appropriately addresses the Carraway Fund’s allocation to U.S. equities? The fund’s allocation to U.S. equities is:
A) too high. A 50-55% allocation to U.S. equities is more appropriate.
B) appropriate.
C) too high. A 35-40% allocation to U.S. equities is more appropriate.
Q11. Which of the following most appropriately addresses the funds allocation to international bonds? The Carraway Fund’s allocation to international bonds is:
A) too low. A 10-15% allocation to international bonds is more appropriate.
B) appropriate. There is no reason to include an allocation to international bonds.
C) too low. A 25-30% allocation to international bonds is more appropriate.
Q12. Which of the following most appropriately addresses the funds allocation to U.S. bonds? The Carraway Fund’s allocation to U.S. bonds is:
A) too high. A 20-25% allocation to U.S. bonds is more appropriate.
B) appropriate.
C) too low. A 70% allocation to U.S. bonds is more appropriate.
Q13. World Wide Telecom (WWT), a troubled internet service provider recently filed Chapter 11 bankruptcy after seven unsuccessful years of operations. It was a plan sponsor in WWT Pension Plan for the benefit of its employees. The following information was available at the time of its bankruptcy filing:
- Employees: 500
- Plan assets: $15 million
- Plan liabilities: $19 million
- Average age of workforce: 30
- 1% of plan assets are being paid out to retirees and no more participants are expected to retire over the next five years.
- Due to the company’s financial condition, the plan was under-funded.
- The duration of the plan liabilities is 25 years.
- Inflation is expected to be approximately 1% over the next five years.
The bankruptcy trustee appointed Eric Geecu, CFA, as the portfolio manager overseeing the WWT Pension Plan to develop guidelines for its investment policy statement and the ultimate distribution of the proceeds of the plan upon fully funded status. Geecu believes that fully funded status could be achieved within the next five years, assuming the plan earns an expected rate of return in excess of its plan liabilities. The plan liabilities are expected to increase at the rate of inflation.
In developing an investment policy statement (IPS) for WWT Pension Plan, which constraints should Geecu consider?
A) A long time horizon, unique circumstances associated with the Chapter 11 bankruptcy, with no current taxes to be considered for the pension plan.
B) A short time horizon, low liquidity needs, with assets managed according to the "prudent expert" rule.
C) The pension plan is governed under ERISA, unique circumstances that the plan cannot provide any funds to meet the plan's underfunded status, and a long time horizon.
[此贴子已经被作者于2009-3-4 17:58:24编辑过] | 
发表于 2009-3-4 17:55
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