Cheatography
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Glossary
Bond |
A Debt instrument |
Bond Issuers |
US Government, US Agencies, Municipalities, Corporations |
Coupon Rate |
Amount of interest that a bond issuer promises to pay investors |
Current Yield |
Bond Coupon divided by bond’s coupon by its market price. |
Discount |
Market Price is LESS than its Par Value |
Duration |
Calculated using the average weighted maturity of all the cash flows associated with the bond; used as a measure of how sensitive a bond’s price is to interest rate movement |
Maturity Date |
Date when a bond’s life ends and the borrower must make the final interest payment and repay the principal. |
Par Value |
Face value of a bond, which the borrower repays at maturity. |
Principal |
Amount of money on which interest is paid |
Premium |
Market Price is GREATER than its Par Value |
Yield to Maturity |
1. Annual rate of return on a bond when it is held to maturity, assuming that all coupon receipts are reinvested at the Yield to Mat. 2. Discount factor that makes Present Value of Interest Payments equal to the current bond price. |
Treasurer’s Primary Activities
Manage Securities Portfolio |
Manage Liquidity and Interest Rate Risk |
Obtain Wholesale Funding |
Maintain Adequate Collateral |
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Security Type
U.S. Treasury Bills/Notes/Bonds |
Lowest credit risk/lowest yield of all securities. Only acceptable form of pledging collateral |
Agency Bonds |
Issued by Federal Government Agencies
Implicit U.S. Guarantees
FNMA: slightly lower credit rating and slightly higher yield than Treasuries
GNMA: Mortgage Backed Securities (“MBS”)
Higher yield due to prepayment risk
Qualify as “mortgage related asset” for FHLB advance eligibility |
Municipal Bonds (“Munis”) |
Bonds issued by State and Local Governments Varying degrees of credit risk Tax Free interest Tax Equivalent Yield = Yield / (1-Tax Rate) When available, Purchases limited to 10% of Par Value Outstanding |
Asset Backed Securities (ABS) |
Securitized loans pools Credit Card Car Loan Outstanding bonds of various terms and credit ratings Fixed rate Variable rate LIBOR Fed Funds |
Wholesale Funding
Jumbo CDs |
(Fixed or Variable) |
FLHLB Borrowings |
(Fixed or Variable) |
Other Borrowed Funds |
• Public Deposits (Demand, Time Deposits) |
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• Non Customer Time Deposits |
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Why Buy/Sell Securities?
Manage the Bank's Liquidity position |
Improve the Portfolio Yield |
Realize Capital Gains or avoid future Losses |
Manage Collateral supply |
Mitigate Credit and Prepayment Risk |
Adjust the Bank's Interest Rate Risk |
Purchase/Sale Decision Factors
Yield Curve Changes |
Interest Rates/Economic Cycle |
Duration |
Collateral Needs |
FHLB Borrowing Eligibility |
Bank's Asset Yield/NIM Impact |
CRA Needs |
Credit Risk |
Balance Sheet Structure |
Duration
Duration is impacted by Coupon and Maturity |
All things considered equal, a Bond will have a higher Duration the:
Smaller the Coupon
Longer the Maturity |
Duration of a Floating Rate Instrument |
Equal to the Rate Adjustment period |
A higher Duration portfolio will have greater volatility |
Rising rates will result in lower market value and unrealized losses |
You can rapidly change the Bank's Asset Duration by selling high Duration bonds and replacing them with low Duration bonds (and vice versa) |
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