AFP AFP Investment Portfolio Management 1 — Questions and Answers
Question 1: Which investment policy statement component defines the acceptable range of risk a corporate treasury can assume?
- Risk tolerance (Correct answer)
- Return objectives
- Liquidity requirements
- Time horizon
Correct answer: Risk tolerance
The risk tolerance component of an investment policy statement defines the boundaries of acceptable risk for the organization's portfolio.
Question 2: What is the primary purpose of laddering a fixed-income portfolio for a corporate treasury?
- To smooth reinvestment risk over time (Correct answer)
- To maximize current yield
- To eliminate credit risk
- To concentrate in short-duration bonds
Correct answer: To smooth reinvestment risk over time
Laddering staggers bond maturities so proceeds are reinvested at different points in time, reducing reinvestment rate risk.
Question 3: Under AFP guidelines, which metric best measures the total return of a short-term investment portfolio?
- Total return (income + price appreciation) (Correct answer)
- Current yield only
- Coupon rate
- Par value change
Correct answer: Total return (income + price appreciation)
Total return captures both income and price changes, giving the most comprehensive view of portfolio performance.
Question 4: Which type of U.S. government security is most commonly used by corporate treasury to meet liquidity needs?
- Treasury bills (T-bills) (Correct answer)
- 30-year Treasury bonds
- TIPS
- Agency mortgage-backed securities
Correct answer: Treasury bills (T-bills)
T-bills have short maturities and high liquidity, making them ideal for corporate treasuries that need quick access to cash.
Question 5: What does duration measure in a fixed-income investment?
- Sensitivity of price to interest rate changes (Correct answer)
- Time until the bond matures
- Coupon payment frequency
- Issuer credit quality
Correct answer: Sensitivity of price to interest rate changes
Duration measures how much a bond's price will change for a given change in interest rates, expressed in years.
Question 6: Which benchmark is most appropriate for evaluating a corporate short-term investment portfolio?
- 90-day T-bill index (Correct answer)
- S&P 500
- 10-year Treasury yield
- High-yield bond index
Correct answer: 90-day T-bill index
The 90-day T-bill index is the standard benchmark for short-duration, high-quality corporate investment portfolios.
AFP AFP Investment Portfolio Management 1
Which investment policy statement component defines the acceptable range of risk a corporate treasury can assume?