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

A bank treasurer is comparing a 91-day Treasury bill with a 5-year Treasury note for the bank's secondary liquidity portfolio. Which statement best describes why the Treasury bill is preferred for liquidity reserve purposes?

The Treasury bill is preferred for liquidity reserves because its very short maturity gives it minimal interest rate price sensitivity, and it trades in a deep, liquid market so it can be sold quickly near par. It pays no coupons and carries no credit premium.

  1. AIt pays semiannual coupons that can be reinvested at higher rates
  2. BIt has minimal price sensitivity to interest rate changes because of its short maturity, and it trades in a deep marketCorrect
  3. CIt offers a higher yield than the note because of its credit risk premium
  4. DIt is exempt from mark-to-market accounting under all frameworks

Explanation

A 91-day bill has very low duration, so its price changes little when rates move, and the Treasury market is deep, allowing quick sale near par. Bills pay no coupons and carry no meaningful credit premium, so options A and C are wrong. D is false because fair value rules can apply.

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