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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank treasurer holds a portfolio of securities and wants to classify them under the accounting categories used for bank investment portfolios. Which feature most clearly distinguishes a security properly held in the held-to-maturity (HTM) category from one held as available-for-sale (AFS) under the traditional US-style framework?

A held-to-maturity security is carried at amortized cost because the bank has both the positive intent and the ability to hold it until maturity. Available-for-sale securities are instead carried at fair value, with unrealized gains and losses recorded outside earnings.

  1. AHTM securities are carried at amortized cost because the bank has the positive intent and ability to hold them until maturityCorrect
  2. BHTM securities are marked to market daily with all gains and losses flowing through earnings
  3. CHTM securities may be sold at any time without any consequence for the classification of other securities
  4. DHTM securities can only include Treasury bonds and cannot include agency or municipal debt

Explanation

HTM classification requires positive intent and ability to hold to maturity, which permits amortized cost carrying value. AFS securities are carried at fair value with unrealized changes going to other comprehensive income. The option on daily marking to earnings describes trading securities, not HTM.

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