A RECENT DOWNTURN IN INTEREST RATES HAS CAUSED SECURITIES PORTFOLIO...

3. A recent downturn in interest rates has caused

securities portfolio duration to

many of Opportunity's variable rate mortgages to be

maintain overall asset duration.

refinanced to 15- and 30-year fixed rate mortgages.

Candidate discussion: Floating rate

Opportunity has retained the business of most of its

loans have lower duration than fixed

customers who have refinanced.

rate loans.

Candidate discussion: 2 points for correctly identifying the influence of each scenario. (Study Session 6, LOS 13.i) (Study Session 12, LOS 25.u) B. Groh is advising one of the bank's clients on the management of the client's family trust. Previously the family trust hired a portfolio manager whose fee was a fixed 1% of assets. The family is now considering another portfolio manager who is paid a lower fixed 0.30% of assets but also charges 20% of any excess return above their benchmark. Discuss one advantage and twodisadvantages of the new manager's fee structure. Grading GuideAnswer for Question 10-B Advantage: Compensation will be more performance based and should better motivate the manager. Disadvantages:  Manager has an incentive to take bigger risks to earn a higher performance fee.  Performance-based fee structures are more complicated to administer. 1 point for identifying the advantage of performance-based fee structures and 1 point for identifying each disadvantage of performance-based fee structures.