GAC Investment Strategies 2 — Questions and Answers
Question 1: Which investment strategy requires a governmental entity to match the maturity of investments with the timing of anticipated cash outflows?
- Duration matching
- Laddering
- Immunization
- Cash flow dedication (Correct answer)
Correct answer: Cash flow dedication
Cash flow dedication (or asset-liability matching) structures the investment portfolio so that maturities align directly with specific future expenditure obligations.
Question 2: Under GASB standards, which of the following is NOT considered a custodial credit risk for governmental investments?
- Securities held by the counterparty
- Securities held by the counterparty's trust department
- Securities held by the government's agent
- Securities registered in the government's name held by a third-party custodian (Correct answer)
Correct answer: Securities registered in the government's name held by a third-party custodian
Securities registered in the government's name and held by a third-party custodian are not exposed to custodial credit risk because the government retains legal ownership.
Question 3: A local government's investment policy limits portfolio duration to 2.5 years. This restriction primarily manages which type of risk?
- Credit risk
- Concentration risk
- Interest rate risk (Correct answer)
- Liquidity risk
Correct answer: Interest rate risk
Portfolio duration limits directly control interest rate risk by restricting how sensitive the portfolio's market value is to changes in interest rates.
Question 4: Which GASB statement requires governments to disclose investment policies and key risks in notes to financial statements?
- GASB 31
- GASB 40 (Correct answer)
- GASB 72
- GASB 84
Correct answer: GASB 40
GASB Statement No. 40 amended GASB 3 to require disclosure of deposit and investment risks including credit, concentration, interest rate, and foreign currency risk.
Question 5: A government pools its idle cash with neighboring jurisdictions into a local government investment pool (LGIP). Under GASB 79, a qualifying LGIP is measured at:
- Fair value
- Amortized cost (Correct answer)
- Net asset value per share
- Lower of cost or market
Correct answer: Amortized cost
GASB 79 allows qualifying external investment pools that meet strict criteria to measure pool investments at amortized cost rather than fair value.
Question 6: Which benchmark is most appropriate for evaluating the performance of a short-term governmental investment portfolio?
- S&P 500 Total Return Index
- Bloomberg U.S. Aggregate Bond Index
- 90-day Treasury bill rate (Correct answer)
- 10-year Treasury note yield
Correct answer: 90-day Treasury bill rate
The 90-day Treasury bill rate is the standard benchmark for short-term governmental portfolios because it reflects a comparable risk-free, liquid investment.
Question 7: When a government purchases a Treasury note at a premium, the amortization of the premium under the effective interest method will:
- Increase interest income over the holding period
- Decrease interest income over the holding period (Correct answer)
- Have no effect on interest income
- Increase the carrying value of the investment over time
Correct answer: Decrease interest income over the holding period
Amortizing a bond premium reduces the carrying value toward par and decreases reported interest income because the coupon received exceeds the effective yield.
GAC Investment Strategies 2
Which investment strategy requires a governmental entity to match the maturity of investments with the timing of anticipated cash outflows?