| Course | FIN 335 Financial Markets |
|---|---|
| Module | Module 4 |
| Paper type | undergraduate project memo analyzing an institution's exposure to interest rate and liquidity risk |
| Length | About 780 words, 4 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Finance |
| Updated | October 2026 |
Free sample paper for FIN 335 Module 4
Memorandum
To: Asset-Liability Committee
From: Treasury Analyst
Date: October 12, 2026
Re: Unrealized losses in the investment portfolio and recommended actions
Purpose
The committee asked whether the investment portfolio's unrealized losses pose a risk to the bank and what, if anything, we should do. Three years after the peak in yields, the portfolio is still $54 million underwater. This memo measures the exposure, explains its effect on capital, compares our position with Silicon Valley Bank's in early 2023, evaluates three options and recommends a partial restructuring together with steps to strengthen liquidity.
The Exposure
Our $620 million portfolio was bought mostly in 2020 and 2021, when deposits surged and loan demand was weak; it yields 1.7 percent on average and has a duration of about 6 years. It is 55 percent agency mortgage-backed securities, 30 percent municipal bonds and 15 percent Treasuries.
Portfolio as of September 30, 2026 ($ millions)
| Category | Book value | Market value | Unrealized loss | Shown in equity? |
|---|---|---|---|---|
| Available for sale | 250 | 229 | -21 | Yes, in accumulated other comprehensive income |
| Held to maturity | 370 | 337 | -33 | No |
| Total | 620 | 566 | -54 |
Losses have fallen from about $80 million in October 2023 as yields eased and bonds moved closer to maturity, and they will continue to shrink as about $85 million of principal is repaid each year.
Effect on Capital
Shareholders' equity is $214 million, which already reflects about $16 million of after-tax losses on available-for-sale bonds. As a bank of our size, we have elected to exclude those losses from regulatory capital, so our ratio of Tier 1 capital to average assets, 9.1 percent, is unaffected. If every loss were recognized, after-tax equity would fall by about $25 million more, to roughly $189 million, or 7.9 percent of assets. That is still well above regulatory minimums. The risk is not insolvency on paper but being forced to sell at a loss to meet withdrawals.
Comparison
Silicon Valley Bank's unrealized losses on held-to-maturity bonds were close to its entire equity at the end of 2022, and about 94 percent of its deposits exceeded the insurance limit, concentrated among venture-backed firms that talked to one another (Board of Governors of the Federal Reserve System, 2023). Our losses equal about a quarter of equity, and 31 percent of our deposits are uninsured, spread across farms, small businesses and local governments, many of whose public deposits are collateralized. Jiang et al. (2024) found that the combination of mark-to-market losses and uninsured deposits, not either alone, drove the vulnerability of banks in 2023. On both measures we are far safer, but the mechanism Diamond and Dybvig (1983) described, a run that forces sales of assets at a loss, is the one we must plan against.
Options
Option A is to hold everything. Losses shrink as bonds mature, and no loss is realized, but the portfolio keeps earning 1.7 percent for years while our marginal funding costs about 3.5 percent.
Option B is to sell all $250 million of available-for-sale bonds, realizing a $21 million pretax loss, and reinvest at about 4.3 percent. Income would rise by about $6.5 million a year, earning back the loss in about 3.2 years. But the loss would reduce earnings and regulatory capital by about $16 million after tax at once, cutting that capital ratio to about 8.4 percent.
Option C is a partial restructuring: sell the $120 million of lowest-yielding available-for-sale bonds, mostly Treasuries and municipals yielding about 1.6 percent, realizing an $11 million pretax loss, and reinvest at 4.3 percent. The added income of about $3.2 million a year earns back the loss in about 3.4 years, while the after-tax hit to capital is about $8 million.
Comparing the options
| Option | Pretax loss | Added yearly income | Earn-back | Tier 1 capital ratio after |
|---|---|---|---|---|
| A: Hold | None | None | n/a | 9.1% |
| B: Sell all AFS | $21 million | About $6.5 million | About 3.2 years | About 8.4% |
| C: Sell $120 million | $11 million | About $3.2 million | About 3.4 years | About 8.8% |
Recommendation
I recommend Option C, executed in the fourth quarter so the loss falls in a year with strong earnings. It improves income with a moderate effect on capital and keeps most of the portfolio available as collateral. Alongside it, we should take four liquidity steps: pledge additional securities at the Fed's discount window and test a borrowing there each quarter; confirm and test our $400 million line with the Federal Home Loan Bank of Des Moines; offer larger depositors reciprocal deposit placement so their balances are fully insured; and add an uninsured-deposit outflow scenario of 30 percent in five days to our stress tests.
Conclusion
The portfolio's losses are a drag on earnings, not a threat to solvency, as long as we are never forced to sell. A partial restructuring improves earnings at a manageable cost, and the liquidity steps make a forced sale far less likely.
References
Board of Governors of the Federal Reserve System. (2023). Review of the Federal Reserve's supervision and regulation of Silicon Valley Bank. https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf
Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401-419. https://doi.org/10.1086/261155
Jiang, E. X., Matvos, G., Piskorski, T., & Seru, A. (2024). Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs? Journal of Financial Economics, 159, 103899. https://doi.org/10.1016/j.jfineco.2024.103899
What the FIN 335 Module 4 instructions ask for
FIN 335 Project One usually asks you to analyze how an institution or investor is exposed to conditions in financial markets, such as interest rate, credit or liquidity risk, and to recommend actions. Guidelines may specify an institution, a format such as a memo or report, and elements such as data analysis, comparison with peers or events, and recommendations supported by evidence. Strong projects quantify the exposure, explain its accounting and regulatory effects, use a relevant comparison and evaluate options with numbers rather than general advice. Many versions let you choose a real institution and use its public filings, such as call reports or annual reports, for the data.
How this FIN 335 Module 4 project one example is built
The memo reports that the bank's $620 million of bonds have a market value of $566 million, an unrealized loss of $54 million: $21 million on available-for-sale bonds, already shown in equity, and $33 million on held-to-maturity bonds, which is not. It compares the bank with Silicon Valley Bank, whose deposits were about 94 percent uninsured, against 31 percent here. It weighs three options and recommends selling $120 million of the lowest-yielding available-for-sale bonds, taking an $11 million loss and reinvesting at about 4.3 percent, which earns the loss back in about 3.4 years. The memo also proposes four liquidity steps, from testing the Fed's discount window to reciprocal deposit placement for larger customers.
Where the FIN 335 Module 4 rubric puts the points
Project One is usually graded on the identification and measurement of the exposure, understanding of accounting and regulatory effects, use of comparisons or market events, evaluation of alternatives, the strength of the recommendation and professional presentation. Strong projects calculate losses and their effect on capital, explain why held-to-maturity and available-for-sale bonds are treated differently, compare the institution with a relevant case and show the payoff of each option. Projects lose points for vague recommendations, for missing the liquidity side and for ignoring how the institution is funded. Some graders also reward a clear timeline for the recommended actions and an owner for each step.
FIN 335 Module 4 help: the mistakes that cost points
Begin by measuring the problem: book value, market value, unrealized loss and how much of it already shows up in equity. Explain what would make the loss real, such as a need to sell for liquidity. Use the 2023 bank failures as a comparison, but compare carefully; the differences in funding often matter more than the size of the losses. Evaluate at least two options with numbers, including an earn-back period for any sale. End with actions and a timeline the committee can approve. Keep the memo short and put the key numbers in one table, since committee members will read it before a meeting. State each assumption, such as the reinvestment yield, so readers can test it.
Get FIN 335 Module 4 written to your instructions
Send the FIN 335 Project One guidelines and the institution's data. The memo will measure the exposure, compare it with a benchmark case, weigh options with real calculations and recommend actions. About two days; your first project is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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FIN 335 Module 4 questions, answered
Where can I find a free FIN 335 Module 4 Project One sample?
This page includes the complete FIN 335 Project One memo on a bank's underwater bond portfolio, with an SVB comparison and recommendations.
What is an unrealized loss on a bond?
The amount by which a bond's market value is below its book value; it becomes a realized loss only if the bond is sold before it recovers.
What is the difference between held-to-maturity and available-for-sale securities?
Held-to-maturity bonds are carried at amortized cost and must normally be held until they mature, while available-for-sale bonds are carried at market value with changes recorded in equity.
What is an earn-back period in a bond restructuring?
The time it takes for the extra income from reinvesting at higher yields to make up the loss realized by selling low-yielding bonds.
Why did Silicon Valley Bank fail?
Rising rates created large losses on its long-term bonds while most of its deposits were uninsured and concentrated among related clients, who withdrew them rapidly once concerns spread.