A Debt instrument
US Government, US Agencies, Municipalities, Corporations
Amount of interest that a bond issuer promises to pay investors
Bond Coupon divided by bond’s coupon by its market price.
Market Price is LESS than its Par Value
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
Date when a bond’s life ends and the borrower must make the final interest payment and repay the principal.
Face value of a bond, which the borrower repays at maturity.
Amount of money on which interest is paid
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
U.S. Treasury Bills/Notes/Bonds
Lowest credit risk/lowest yield of all securities. Only acceptable form of pledging collateral
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
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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 Changers
Interest Rates/Economic Cycle
FHLB Borrowing Eligibility
Bank's Asset Yield/NIM Impact
Balance Sheet Structure
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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