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

A bank treasurer is reviewing the securities portfolio. Which feature of a government Treasury bill most directly explains why it is classified as a primary liquidity reserve asset?

Treasury bills qualify as primary liquidity reserves because they can be sold fast in deep markets with very small price concessions and have minimal credit risk. Yield or long maturity does not create liquidity; marketability and price stability do.

  1. AIt offers the highest yield among investment-grade securities
  2. BIt can be sold quickly in a deep market with minimal price concession and low credit riskCorrect
  3. CIt is exempt from all mark-to-market accounting
  4. DIt carries a long maturity that locks in stable income

Explanation

Liquidity reserve assets are valued for being convertible into cash quickly at little loss of value. Treasury bills have deep secondary markets, short maturity and negligible credit risk. High yield and long maturity are not liquidity features and typically conflict with them.

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