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

A community bank's treasurer holds a portfolio of Treasury securities and is worried that a sharp rise in interest rates will cut the portfolio's market value. Which strategy is designed to protect against this specific risk by spreading holdings across a range of maturities?

A laddered maturity strategy is correct. By holding roughly equal amounts maturing in each period, the bank reinvests maturing funds at current rates and avoids concentrating rate exposure in one maturity, while also getting regular liquidity. A long bullet would increase exposure to rising rates.

  1. AA laddered maturity strategy, with roughly equal amounts maturing each periodCorrect
  2. BA bullet strategy concentrated at a single long maturity
  3. CA barbell strategy placing all funds in the longest and shortest maturities only
  4. DA strategy of buying only the highest-yielding long-term bonds

Explanation

A laddered strategy spreads holdings evenly across maturities, so a steady portion matures each period and can be reinvested at prevailing rates. This limits exposure to any single rate move and gives regular liquidity. A bullet concentrated in one long maturity increases rate risk rather than reducing it.

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