Skip to content

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

A bank's treasury manager is deciding how to classify a newly purchased portfolio of government bonds. The bank intends to hold the bonds to collect contractual cash flows and has no plan to sell them before maturity. Under an amortized-cost framework, which feature of this classification is most relevant to the bank's reported earnings?

Securities held to collect contractual cash flows are carried at amortized cost, so unrealized gains and losses from market rate movements are not recognized in earnings. Fair value through income would apply only to trading holdings, which is not the case for this hold-to-maturity style portfolio.

  1. AInterest rate-driven changes in fair value pass through the income statement each period
  2. BUnrealized gains and losses from market rate changes are not recognized in earningsCorrect
  3. CThe bonds must be marked to market daily and reported at exit price
  4. DThe bonds are treated as trading assets for regulatory capital purposes

Explanation

Securities held to collect contractual cash flows are carried at amortized cost, so market-driven fair value changes do not hit earnings. Options A and C describe fair value through profit or loss accounting, which would apply to trading positions. Option D is incorrect because banking-book holdings are not trading assets.

Did you get it right without looking?

One question tells you little. A timed set on The Investment Function in Financial Services Management shows your real accuracy, how long you take and where you lose marks.

Practise The Investment Function in Financial Services ManagementFree diagnostic mock

More The Investment Function in Financial Services Management questions