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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.
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
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.
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

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)
• Non Customer Time Deposits

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
Collateral Needs
FHLB Borrowing Eligib­ility
Bank's Asset Yield/NIM Impact
CRA Needs
Credit Risk
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)

Bond Price See Saw



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