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FRM Part II · FRM Exam Part II · Liquidity and Reserves Management: Strategies and Policies

A bank's funding maturity profile shows USD 200 million of liabilities maturing in each of the next five years, with a further USD 400 million due in year 2 alone from a single bond series. The bank's board wants to reduce refinancing concentration without raising total debt. Which action is most appropriate?

Buying back part of the year-2 bonds and reissuing into years with fewer maturities is most appropriate. It smooths the maturity ladder and lowers refinancing concentration while keeping total debt unchanged, whereas more year-2 issuance or one large deal would increase concentration.

  1. ABuy back part of the year-2 bond and replace it with issuance in years with lighter maturitiesCorrect
  2. BIssue additional year-2 debt to build a bigger liquidity buffer for that date
  3. CShorten all remaining maturities to reduce duration of liabilities
  4. DRaise all new issuance in a single large benchmark deal to save costs

Explanation

Year 2 has a wall of USD 600 million versus 200 elsewhere. Smoothing the maturity ladder by repurchasing and reissuing into lighter years reduces concentration without changing total debt. Adding year-2 debt worsens the wall, and a single large deal creates new concentration.

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