Chapter 7 Investments in Debt and Equity Securities

Introduction

7.01 Financial institutions acquire securities for various purposes. In addition to providing a source of income through investment or resale, securities are used to manage interest-rate and liquidity risk as part of an institution's overall asset/liability management strategies. They are also used in certain collateralized transactions. The most common securities acquired by institutions are described in the subsequent paragraphs. Investments that meet the definition of a security as defined in the FASB Accounting Standards Codification (ASC) glossary are discussed in this chapter. Other investments, including nonmarketable equity securities such as investments in Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock, are discussed in chapter 12, "Other Assets, Other Liabilities, and Other Investments," of this guide.

7.02 A direct relationship generally exists between risk and return (the higher the security’s risk, the higher its expected yield). An inverse relationship generally exists between the security’s liquidity and its yield; less liquid and longer-term securities generally have higher yields. Achieving the proper mix of safety, liquidity, and yield in an investment portfolio is one of the primary tasks of management. In managing their investment portfolios, financial institutions seek to maximize their returns without jeopardizing the liquidity the portfolios provide. Asset/liability management ...

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