Cash Flows in the Investment Portfolio

Smoothing out risk and reward

Prudent management of a bank's investment portfolio requires a clear understanding of the dynamics of cash flows. A bond, or any financial asset for that matter, is essentially a set of future payments that are purchased with the expectation of a positive return when the entire principal is repaid. And a portfolio of bonds is simply the collective sum of those cash flows from each individual security. If you avoid credit risk and focus only on highgrade securities, you can concentrate on the management of those cash flows to produce a reasonably predictable stream of liquidity, which can be re-invested in future months or years and provide an optimal …