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

An institution's investment policy requires that securities held for liquidity can be converted to cash quickly with little price concession. Which asset would a risk manager rank as the LEAST suitable for this purpose?

The thinly traded unrated municipal bond is least suitable, because few buyers and wide bid-ask spreads mean a quick sale would require a large price concession. Overnight reverse repos, Treasury bills and large-agency discount notes are short, high-quality and highly liquid.

  1. AOvernight reverse repurchase agreement backed by Treasuries
  2. BShort-dated Treasury bills
  3. CThinly traded unrated municipal bond of a small issuerCorrect
  4. DAgency discount notes of a large agency

Explanation

A thinly traded unrated small-issuer bond has wide bid-ask spreads and few buyers, so selling quickly would require a price concession. The other three are short-term, high-quality, and trade in deep markets or mature overnight.

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