Non-life Insurance company: Liquidity

[FrankCFA]

Curriculum:
Quite often it maintains a portfolio of short-term securities, such as commercial paper or Treasury bills, as an immediate liquidity reserve.
Question:
1. Does Treasury bills means Treasury bond will mature less than one year?
2. Does it mean the portfolio required very active management given the commercial paper or Treasury bills will be matured soon?
Thanks.

 

[cpk123]

FrankCFA wrote:
Curriculum:
Quite often it maintains a portfolio of short-term securities, such as commercial paper or Treasury bills, as an immediate liquidity reserve.
Question:
1. Does Treasury bills means Treasury bond will mature less than one year?

yes

FrankCFA wrote:
2. Does it mean the portfolio required very active management given the commercial paper or Treasury bills will be matured soon?
Thanks.

Not necessarily. it just means that they may need to liquidate their funds - or pay out on their liabilities in the short term. So they need enough funds to meet that requirement. They are trying to avoid liquidating their portfolio unless absolutely necessary.

 

[Galli]

FrankCFA wrote:
Question:
1. Does Treasury bills means Treasury bond will mature less than one year?
2. Does it mean the portfolio required very active management given the commercial paper or Treasury bills will be matured soon?
Thanks.

Keep in mind bills are quite different from bonds. To say a bill is a bond that matures in less than a year is incorrect. They: 1) do no pay coupons 2) sell at a discount to par upon issuance.
Active management would be redundant in this situation. Remember, (simpy stated) active management is the manager seeking to produce returns in excess of the market by applying various strategies. Since the manager is keeping these funds in highly liquid low volitality investments, actively managing them would be “risky” knowing liabilies are on the horizon.

 

[S2000magician]

Galli wrote:

FrankCFA wrote:Question:
1. Does Treasury bills means Treasury bond will mature less than one year?
2. Does it mean the portfolio required very active management given the commercial paper or Treasury bills will be matured soon?
Thanks.

Keep in mind bills are quite different from bonds. To say a bill is a bond that matures in less than a year is incorrect. They: 1) do no pay coupons 2) sell at a discount to par upon issuance.

T-bills are nothing more or less than zero-coupon bonds.