The Consideration of Coupon Levels, Taxes, Reinvestment Rates, and Maturity in the Investment Management of Financial Institutions

Abstract

The investment managers of financial institutions face a multiplicity of factors that influence the performance of fixed coupon securities in their investment portfolios. These factors can be classified under three headings:1) Condition of the economy–changes in interest rate levels and spreads;2) Nature of the financial institution–institution's tax rate, economic factors such as deposit variability and loan demand for banks, and premium inflow and benefit payments for insurance companies;3) Characteristics of individual securities–(a) their attractiveness in terms of risk level and marketability; and (b) their contractual factors (coupon level and maturity) and tax status.