Since interest rates and fair value of yield are directly correlated, an increase in rates would result in an increase in fair value and a fall in fair value. 4.Explain why banks do not want increased volatility in their regulatory capital. Banks do not want their regulatory capital to be more volatile since that would result in the bank being subject to more regulations. These rules would have a significant impact on how the bank is managed. Additionally, the increased volatility could hurt the banks' reputation because it will be thought that they are involved in hazardous trading. 5.According to the FASB, how should banks decide whether to classify a given debt investment as trading, AFS or HTM? Do you think banks use significant judgment in this classification decision? Explain why or why not. The classification of debt investments varies depending on how long the bank intends to hold the investment. Banks do exercise significant judgment when making decisions; they carefully consider pertinent aspects like prior experience with comparable instruments. 6.If a bank wants to avoid volatility in its regulatory capital, which investment classification would be the most desirable, and which investment classifications would be the least desirable? Does your answer differ depending on whether the bank is large or small? Banks should categorize more investments as HTM to reduce volatility. The demand for HTM securities is higher, and it offers less risk for investments over a longer period of time. For large banks, AFS securities are even less appealing because they are subject to AOCI for the realization of unrealized gains and losses on their assets. 7.Once a bank chooses to classify a given investment as HTM, can it subsequently change that classification? What are the potential consequences of selling an HTM
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