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

A bank uses a laddered maturity strategy, with $20 million of bonds maturing each year over five years. Each maturing bond is reinvested at the five-year end of the ladder. Which statement best describes the strategy's characteristics?

A laddered strategy provides regular liquidity as bonds mature each year and spreads reinvestment across different rate environments, so it needs little interest rate forecasting. It is a passive approach, not one designed to maximise capital gains from falling rates or to concentrate risk at the long end.

  1. AIt requires accurate interest rate forecasts to be effective
  2. BIt provides regular liquidity from maturities and averages reinvestment rates over time, with limited need for forecastingCorrect
  3. CIt concentrates all interest rate risk at the long end
  4. DIt maximises capital gains when rates fall

Explanation

A ladder produces a steady stream of maturing principal, supporting liquidity, and reinvestment occurs at varying rate levels over time, smoothing results. It needs little forecasting. It is a passive approach and does not target gains from rate moves.

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