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• W82785259 abstract "Advance Initial rate 1-year bullet 5.86% 5-year bullet 6.08% 5-year non-call 1-year 5.35% 4-year bullet 6.06% 5-year non-call 3-month 5.17% 5 year bullet: advance Rates Rates Rates up Rates up Horizon: 1 year/ down unchanged 100 200 Coupon: 6.08% 100 Horizon yield 5.06% 6.06% 7.06% 8.06% Horizon price 103.65 100.07 96.64 93.34 Reinvestment rate 5.25% 5.75% 6.25% 6.75% Total Cost 9.58% 6.14% 2.79% -0.48% 5- year all 1-year advance Rates Rates Rates up Rates up Horizon: 1 year down unchanged 100 200 Coupon: 5.35% 100 Horizon yield 4.61% 5.17% 5.35% 5.35% Horizon price 102.68 100.64 100.00 100.00 Reinvestment rate 5.25% 5.75% 6.25% 6.75% Total Cost 7.94% 5.98% 5.36% 5.37% Rates Rates Rates up Rates up Selected securities down 100 unchanged 100 200 1-year advance 5.86% 5.86% 5.86% 5.86% 5-year bullet advance 9.58% 6.14% 2.79% -0.48% 5-year 1-year adv. 7.94% 5.98% 5.36% 5.37% Combination 7.72% 6.00% 4.33% 2.69% Banks have experienced declining net interest margins as rates have fallen over the last year. Many banks have responded by initiating new strategies to prop up declining margins. These strategies all entail taking on additional risk (although this risk is often not fully quantified). There are four risk-taking strategies banks typically employ to improve declining margins. These include taking more interest-rate risk by extending the portfolio, increasing option or credit risk to obtain higher yields, lowering the overall cost of funds (and risk losing depositors), or implementing a leverage strategy to add to current earnings. Here we will focus on this last strategy, that of leveraging to add to earnings. We believe that today's rate environment is not the most advantageous for leveraging the bank's balance sheet. Still, faced with earnings pressures, many banks feel compelled to consider such a strategy. The purpose of this article is to examine the liability side of this transaction. In particular, we will analyze an increasingly popular funding strategy for leverage, the borrowing, or what we refer to as a callable Callable advances are borrowings (liabilities) where the lender, usually the Federal Home Loan Bank (FHLB), reserves the right to call the advance before maturity but not before some predetermined date. For example, the FHLB may lend an amount for five years but reserve the right to the loan at or after one year. We would this a 5-year non-call 1-year advance. Confusing nomenclature Interestingly, the Federal Home Loan Banks have seven different names for what is essentially the same product. Only one of the 12 regional FHLBs actually refer to these advances as advances. The most popular name is a convertible Some of the FHLBs use this name because instead of calling your advance outright, they convert it to a floating-rate advance at the prevailing rate. The borrower then has the option to this new advance back to the FHLB. Because of this put feature, some of the FHLBs refer to this advance as a putable convertible advance. But aren't these convertible advances the same thing as the advance? Since the FHLB is converting the advance to another advance that is by definition worth par, they are in effect calling the advance at par. The put option that the borrower has here is virtually worthless. To my surprise, some of the FHLBs actually refer to the advance as a putable advance. …" @default.
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• W82785259 date "1998-09-01" @default.
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• W82785259 title "Callable Advances: Low Rates. .at a Price" @default.
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