FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management
A bank holds a $200 million securities portfolio. Management's policy says the portfolio must provide liquidity, so at least 30% must be in assets that can be sold within one day with negligible loss. Currently $48 million is in Treasury bills, $30 million in on-the-run Treasury notes (both one-day liquid), and the remainder is in municipal and corporate bonds that are illiquid. By how much must the bank increase one-day liquid holdings, funded by selling illiquid assets, to meet the policy?
None of the options is correct as computed.
- A$12 millionCorrect
- B$18 million
- C$22 million
- D$30 million
Explanation
Liquid holdings are 48 + 30 = $78 million, or 39% of $200 million. Required minimum is 0.30 x 200 = $60 million, which is already exceeded by $18 million. So no increase is needed.
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