Financial Risk Manager Part 2

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Explanation:

The Term Structure of Expected Cash Flows (TSECF) tracks expected inflows and outflows.

At time 0, there is a cash outflow to purchase the bond at 102% of par: Outflow = 1.02 * GBP 20M = GBP 20.4 million.
At month 6, the semi-annual coupon payment is received: Inflow = (8% / 2) * GBP 20M = GBP 0.8 million. Net expected cash flow up to the 7-month horizon = -20.4M + 0.8M = -19.6 million. Thus, the TSECF decreases by GBP 19.6 million.

The Term Structure of Available Assets (TSAA) tracks non-cash unencumbered assets that can be mobilized for liquidity. When the bond is purchased, it is added to the bank's pool of available assets. In liquidity management, an unencumbered high-quality bond is frequently added to the TSAA at its face/par value (assuming no specific haircut is stated), which increases the TSAA by its GBP 20 million face amount. Therefore, Option B accurately describes the decrease in TSECF and the increase in TSAA.

Explanation:

The Term Structure of Expected Cash Flows (TSECF) tracks expected inflows and outflows.

At time 0, there is a cash outflow to purchase the bond at 102% of par: Outflow = 1.02 * GBP 20M = GBP 20.4 million.
At month 6, the semi-annual coupon payment is received: Inflow = (8% / 2) * GBP 20M = GBP 0.8 million. Net expected cash flow up to the 7-month horizon = -20.4M + 0.8M = -19.6 million. Thus, the TSECF decreases by GBP 19.6 million.

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Question A bank plans to purchase a newly issued 1-year bond with a face value of GBP 20 million. The bond has an annualized coupon rate of 8%, paid semi-annually, and is priced at 102% of par. A treasury analyst is asked to describe the impact of this purchase on the term structure of expected cash flows (TSECF) and the term structure of available assets (TSAA). Which of the following correctly describes the change in both the TSECF and the TSAA with a 7-month time horizon at the time the purchase is made?

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Last updated: July 5, 2026 at 07:29

The TSECF will decrease by GBP 20 million and the TSAA will increase by GBP 20.4 million.

The TSECF will decrease by GBP 19.6 million and the TSAA will increase by GBP 20 million.

The TSECF will increase by GBP 19.6 million and the TSAA will decrease by GBP 20 million.

The TSECF will increase by GBP 20 million and the TSAA will decrease by GBP 20.4 million.