Managing the Investment Portfolio

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Managing the Investment Portfolio"

Transcription

1 Managing the Investment Portfolio GSBC Executive Development Institute April 26, 2015 Portfolio Purpose & Objectives Tale of Two Balance Sheets o Components of Core Balance Sheet Originated loans Retail deposits Composition driven by market demand and conditions o Components of Managed Balance Sheet Investments Loan purchases & sales Wholesale funding Derivatives & hedging Composition driven by management strategic decision making When you combine the two balance sheets, you achieve your target balance sheet 1

2 Managing Both Investment Portfolios o Today Portfolio Focus is on present needs and market conditions Current yield and income Existing interest rate and liquidity risks Problem: It s a limited view, no more than a snapshot of a point in time o Future Portfolio Focus is on needs and objectives beyond the present Considers effect of changes in market conditions How do changes affect investment price, yield and duration? Example: Total return Interest Rate Risk (IRR) Management Risk incurred by a financial institution when the maturities of its assets and liabilities are mismatched Change in interest rates results in change in value of assets/liabilities or net income Mismatch between assets/liabilities results in the balance sheet having some type of sensitivity 2

3 Role of Investment Portfolio o Investment holdings can act as offset to loan characteristics o Positions can be established quickly and efficiently (loans can take time to grow) o Once built, positions can be run off as new loans take their place Liquidity Risk Management The risk that a bank will be unable to obtain funding to fund asset growth or to meet liability demands without experiencing large losses o Can be a sudden surge of liability withdrawals or a sudden lack of funding sources o Can occur due to a surge in asset growth, e.g. credit line usage o Can be institution-specific or systemic o Liquidity risk generally blooms into a crisis as a result of another risk factor, e.g. credit risk, interest rate risk, etc. o Can ultimately evolve from a liquidity problem into a solvency problem Role of Investment Portfolio o Liquidity is getting more regulatory scrutiny due to inherent IRR (rates rise, bond values fall) o Can be used for raising cash through asset sales o More important role: managing cash flow o Principal cash flows can be used to pay for loan growth or to offset liability reductions o Portfolio liquidity can be affected by use of less liquid investments, i.e. not Treasuries or agency bonds 3

4 Investment Terms & Concepts A bond s price is the current (present) value of all cash flows (interest and principal) over its lifetime Par Value Coupon o Also known as notional or face value o The amount that the issuer agrees to repay by the maturity date, or the amount of the bond that you are purchasing (but not necessarily the amount you will pay for the investment) o The interest rate that the issuer pays the investor o Usually semi-annual payments, but can vary o Do not confuse the coupon rate with the yield!! Term to Maturity o The number of years over which the issuer agrees to pay interest to the investor, until the principal is paid on the maturity date 4

5 Bond Pricing & Quotes Par equals the face value of the bond; in pricing, par equals 100 Bond pricing is quoted as a percentage of par Bond Discounts & Premiums o Discount = bond is trading at a price below par o Premium = bond is trading at a price above par Bond Yield o Yield to Maturity (YTM) = Internal rate of return (IRR) earned by an investor who purchases a bond at a given price, if: The bond is held to maturity All income earned is reinvested at the same rate as the YTM All interest and principal payments are made on schedule o If any of the assumptions do not hold, the YTM will vary o Yield to maturity Current yield o Yield to maturity Coupon rate Investment Risks Credit Risk o Default Risk the bond issuer fails to meet its obligations of timely interest and principal payments to the investor o Downgrade Risk a reduction in credit rating results in price decline to reflect higher risk and yield o Credit Spread Risk the yield spread between Treasuries and other bonds widens, resulting in a price decline Interest Rate Risk (IRR) o IRR is defined as the sensitivity of a fixed income security s price caused by a change in interest rates o Duration: the Primary Risk Measure for IRR A sensitivity measure that determines the percentage degree of change in price given a ±100bp move in interest rates Duration is a weighted average of all cash flows (interest & principal) received over the life of a bond Can be used to compare securities with different characteristics (maturity terms, coupons, cash flows, etc.) 5

6 In addition to individual securities, duration can also be used to measure the overall interest rate risk of an investment portfolio o Factors that can affect IRR Liquidity Risk Maturity Coupon Rate Embedded Options o The risk that an investor will have to sell a bond at a much lower price than its indicated true value, OR o The inability to sell a security (worst case) Prepayment Risk (a/k/a Optionality ) o The risk that your principal investment is returned to you sooner than the stated final maturity o Also referred to as optionality o Callable bond cash flows are uncertain o Mortgage prepayments are unknown o Problem: calls and prepayments are more likely to occur during periods of lower interest rates and steep yield curves o Another problem: price appreciation is limited due to effect of negative convexity Extension Risk o This is prepayment risk s ugly cousin (at least right now)... o Some fixed income securities (MBS, CMO) have variable principal cash flows o A material slowdown in principal payments can cause the life and duration to lengthen o Pricing and volatility will adjust to new conditions o This is a bigger issue when rates are rising 6

7 Fixed Income Securities Treasuries o Most liquid investment choice o Risk-free investment Agencies & Government Sponsored Entities (GSEs) o Issued by Federal agencies & government-sponsored enterprises (GSEs) o Only GNMA is backed by the full faith and credit of the U. S. government o While Fannie Mae & Freddie Mac are under Federal conservatorship, their bonds are NOT explicitly government-backed o As a result, investors do have some potential for credit risk o Some agency securities (FHLB, FFCB, TVA) are exempt from state taxation o Agency issues can be bullets or callables, and can be bought at issue (new) or in the secondary market Dealing with Embedded Options o What is an option? Gives the buyer the right to take some action within a specified timeframe Gives the seller the obligation to respond upon the option s exercise by the buyer o Two types of options: Calls, Puts (for our purposes, we re only considering calls) o Non-Callable Bond (Bullet) Bond has a firm maturity date o Callable Bond (Bond with Embedded Call Option) Issuer has the right to retire the bond at a specified time prior to the bond s maturity date o As an investor, you are the option seller, meaning you are obligated to honor the call when it is exercised Q: Since you re selling an option, where s the option premium? A: You get paid for this in the form of a higher coupon. o Agency Call Structures Continuous (American) Once call date is past, bond can be called at any time until maturity Discrete (Bermuda) After call date, bond is callable on a predetermined schedule (quarterly, semi-annually, annually) One-Time (European) Bond can only be called on call date Canary Call (Step Up) Bond is callable on a predetermined schedule during the first step, then must be called or converts to a bullet step-up bond o Factors Affecting Call Options 7

8 Interest rates (current and forward) Coupon rate Time to maturity Step-Up Agency Bonds o Agency bond with a variable coupon rate o Coupon steps up in rate based on a predetermined schedule o Bonds are usually callable (European/Canary, Bermuda, Continuous) o Why Should We Want Step-Ups? Protection against rising interest rates First step coupon is higher than comparable short-term investments Potential for higher coupons later in the life of the investment Overall yield is usually higher than alternative bonds So the investor wins, the issuer wins, the broker wins... What???!! 8

9 9

10 Municipal Bonds o Issued by state, county and local governments, as well as other public entities o Why invest? Tax-exempt income! o Must be bank-qualified (or bank-eligible) o Given tax-exempt status, credit unions do not benefit from investment in munis o Tax considerations, e.g. AMT, could limit investment opportunities o Bullet and callable structures are available o Some credit risk, but lower historical default rates than corporate bonds o Municipal Bond Types General Obligation Backed by the taxing and further borrowing power of the issuing municipality (limited and unlimited) Revenue Issued to finance public works, such as: Water & sewer systems Turnpikes Colleges & universities Hospitals Airports And supported by revenues of the associated project 10

11 Corporate Bonds o Issued by private corporations o Priority over common and preferred shareholders o May be secured or unsecured o Full exposure to credit risk o Credit rating reflects credit risk (and coupon) o Bullets & callables available The Need for Increased Bond Due Diligence o Section 939A of the Dodd-Frank Act requires that bank investments meet minimum credit quality standards independent of ratings assigned by national rating agencies o As of January 1, financial institutions were expected to ensure that investments held meet an investment grade standard o FDIC and OCC have incorporated the standards into their final rules and guidance on permissible investments o Banks can no longer rely solely on credit ratings to assess whether an investment is investment grade o Pre- and post-purchase analysis is required; banks need to demonstrate that issuer presents low risk of default and is likely to make full and timely repayment of principal and interest 11

12 Mortgage-Backed Securities o Security created through pooling and backing of residential mortgages o Issued by Federal agencies (GNMA, FNMA, FHLMC) or private entities (non-agency or private label ) o Types of MBS Passthrough securities Collateralized mortgage obligations (CMOs) Commercial Mortgage-Backed Securities (CMBS) multi-family properties Includes DUS, K-bonds, project loans Home Equity Conversion Mortgages (HECMs) Reverse mortgages 12

13 o MBS Structures Fixed Rate (30-, 20-, 15-, 10-year) Adjustable Rate (ARMs) Short reset (rate adjusts annually) Hybrid ARMS o Fixed rate period followed by annual ARM structure for remaining life of mortgage o 3/1, 5/1, 7/1, 10/1 structures Collateralized Mortgage Obligations (CMOs) o The biggest risk for MBS pass-through securities is prepayment risk o What if there were a way to control of mitigate that risk? o There is... 13

14 Commercial MBS o Mortgage pools composed of multi-family properties o Examples: Apartments, condos, student housing, senior housing o Issued by Fannie Mae (DUS and ACEs) and Freddie Mac (Freddie-Ks) (also private label) o Fixed rate o Single or multi-pools o Balloon maturity (acts like a bond) o Yield maintenance call protection (passed to investor) SBA Pools o Pools made up of small business loans o Backed by SBA (full faith & credit, 0% risk weighted) o Uncapped floating rate security (tied to Prime) some fixed pools are issued o Monthly or quarterly rate reset o Most pools trade at very high premiums (due to coupon) o Prepayment risk is biggest risk due to premiums 14

15 15

Chapter 10. Fixed Income Markets. Fixed-Income Securities

Chapter 10. Fixed Income Markets. Fixed-Income Securities Chapter 10 Fixed-Income Securities Bond: Tradable security that promises to make a pre-specified series of payments over time. Straight bond makes fixed coupon and principal payment. Bonds are traded mainly

More information

Important Information about Investing in Bonds

Important Information about Investing in Bonds Robert W. Baird & Co. Incorporated Important Information about Investing in Bonds Baird has prepared this document to help you understand the characteristics and risks associated with bonds and other fixed

More information

US TREASURY SECURITIES - Issued by the U.S. Treasury Department and guaranteed by the full faith and credit of the United States Government.

US TREASURY SECURITIES - Issued by the U.S. Treasury Department and guaranteed by the full faith and credit of the United States Government. Member NASD/SIPC Bond Basics TYPES OF ISSUERS There are essentially five entities that issue bonds: US TREASURY SECURITIES - Issued by the U.S. Treasury Department and guaranteed by the full faith and

More information

Best Practices in Asset Liability Management

Best Practices in Asset Liability Management Best Practices in Asset Liability Management Frank Wilary Principal Wilary Winn LLC September 22, 2014 1 Topics Covered Best practices related to ALM modeling Best practices related to managing the ALM

More information

Financial Instruments. Chapter 2

Financial Instruments. Chapter 2 Financial Instruments Chapter 2 Major Types of Securities debt money market instruments bonds common stock preferred stock derivative securities 1-2 Markets and Instruments Money Market debt instruments

More information

MORTGAGE BACKED SECURITIES

MORTGAGE BACKED SECURITIES MORTGAGE BACKED SECURITIES A Mortgage-Backed Security is created when the issuing Agency purchases a number of investment quality residential home mortgages from various banks, thrifts, or mortgage companies.

More information

20. Investments 4: Bond Basics

20. Investments 4: Bond Basics 20. Investments 4: Bond Basics Introduction The purpose of an investment portfolio is to help individuals and families meet their financial goals. These goals differ from person to person and change over

More information

Bonds, in the most generic sense, are issued with three essential components.

Bonds, in the most generic sense, are issued with three essential components. Page 1 of 5 Bond Basics Often considered to be one of the most conservative of all investments, bonds actually provide benefits to both conservative and more aggressive investors alike. The variety of

More information

Floating-Rate Securities

Floating-Rate Securities Floating-Rate Securities A floating-rate security, or floater, is a debt security whose coupon rate is reset at designated dates and is based on the value of a designated reference rate. - Handbook of

More information

RBC Money Market Funds Prospectus

RBC Money Market Funds Prospectus RBC Money Market Funds Prospectus November 25, 2015 Prime Money Market Fund RBC Institutional Class 1: RBC Institutional Class 2: RBC Select Class: RBC Reserve Class: RBC Investor Class: TPNXX TKIXX TKSXX

More information

Chapter 10. The Good Old Days. The New Way. Secondary Markets. Depository Lenders in the Primary Market. Nondepository Lenders in the Primary Market

Chapter 10. The Good Old Days. The New Way. Secondary Markets. Depository Lenders in the Primary Market. Nondepository Lenders in the Primary Market The Good Old Days Chapter 10 The Secondary Mortgage Market Banks and Savings and Loans made loans and held these loans in portfolio The interest paid on the loan was use to pay interest to the depositors

More information

Structured Financial Products

Structured Financial Products Structured Products Structured Financial Products Bond products created through the SECURITIZATION Referred to the collection of Mortgage Backed Securities Asset Backed Securities Characteristics Assets

More information

Prospectus Baird Funds

Prospectus Baird Funds Prospectus Baird Funds May 1, 2014 Baird Ultra Short Bond Fund (Institutional Class: BUBIX) (Investor Class: BUBSX) Baird Short-Term Bond Fund (Institutional Class: BSBIX) (Investor Class: BSBSX) Baird

More information

Where can credit unions turn when looking for more income today with protection from higher interest rates in the future?

Where can credit unions turn when looking for more income today with protection from higher interest rates in the future? Back to Basics Hybrid ARMs By Tom Slefinger, Senior Vice President, Director of Institutional Fixed Income Sales at Balance Sheet Solutions, LLC. Tom can be reached at tom.slefinger@balancesheetsolutions.org.

More information

P r i m e r : Agency Bonds

P r i m e r : Agency Bonds P r i m e r : Agency Bonds j a n n e y corporat e credit F e b r u a ry 5, 2014 Agencies provide extra yield vs. Treasuries, offer predictable and relatively safe income, and can be a part of a diversified

More information

FIXED INCOME. Consistent Revenue A WIDER VIEW TM

FIXED INCOME. Consistent Revenue A WIDER VIEW TM FIXED INCOME Consistent Revenue A WIDER VIEW TM It s time for A WIDER VIEW. TM It s the view that says stocks, bonds, mutual funds, annuities, life insurance, every type of investment has to make a contribution

More information

UNDERSTANDING INVESTMENT BASICS

UNDERSTANDING INVESTMENT BASICS UNDERSTANDING INVESTMENT BASICS Today s Presentation Purpose Objectives Topics O.R.C. 135.35 Due Diligence CDs Bonds Strategy INVESTMENT POLICY County Inactive Moneys - O.R.C. 135.35 Permissible Activities/Investments

More information

Answers to Chapter 7 Questions

Answers to Chapter 7 Questions Answers to Chapter 7 Questions 1. Mortgage markets are examined separately from bond and stock markets for several reasons. First, mortgages are backed by a specific piece of real property. If the borrower

More information

Bond Mutual Funds. a guide to. A bond mutual fund is an investment company. that pools money from shareholders and invests

Bond Mutual Funds. a guide to. A bond mutual fund is an investment company. that pools money from shareholders and invests a guide to Bond Mutual Funds A bond mutual fund is an investment company that pools money from shareholders and invests primarily in a diversified portfolio of bonds. Table of Contents What Is a Bond?...

More information

The Mortgage Market. Concepts and Buzzwords. Readings. Tuckman, chapter 21.

The Mortgage Market. Concepts and Buzzwords. Readings. Tuckman, chapter 21. The Mortgage Market Concepts and Buzzwords The Mortgage Market The Basic Fixed Rate Mortgage Prepayments mortgagor, mortgagee, PTI and LTV ratios, fixed-rate, GPM, ARM, balloon, GNMA, FNMA, FHLMC, Private

More information

Mortgage-Related Securities

Mortgage-Related Securities Raymond James Michael West, CFP, WMS Vice President Investments 101 West Camperdown Way Suite 600 Greenville, SC 29601 864-370-2050 x 4544 864-884-3455 michael.west@raymondjames.com www.westwealthmanagement.com

More information

Fixed Income Investment Strategies

Fixed Income Investment Strategies Fixed Income Investment Strategies Overall Bond Philosophy At EGI Financial, Inc. we believe the most important role fixed-income assets play in portfolio management is to reduce risk relative to an all

More information

Federated Fund for U.S. Government Securities

Federated Fund for U.S. Government Securities Summary Prospectus May 31, 2016 Share Class A B C Ticker FUSGX FUSBX FUSCX Federated Fund for U.S. Government Securities A Portfolio of Federated Income Securities Trust Before you invest, you may want

More information

Federated Fund for U.S. Government Securities II

Federated Fund for U.S. Government Securities II Prospectus April 30, 2016 Federated Fund for U.S. Government Securities II A Portfolio of Federated Insurance Series A mutual fund seeking to provide current income by investing primarily in a diversified

More information

NCPERS Trustee Education Seminar

NCPERS Trustee Education Seminar NCPERS Trustee Education Seminar FIXED INCOME 101 May 2, 2015 Steve Eitel Senior Vice President Senior Institutional Client Advisor steven.eitel@pnc.com 312-384-8259 What is a bond or fixed income security

More information

CHAPTER 2. Asset Classes. the Money Market. Money market instruments. Capital market instruments. Asset Classes and Financial Instruments

CHAPTER 2. Asset Classes. the Money Market. Money market instruments. Capital market instruments. Asset Classes and Financial Instruments 2-2 Asset Classes Money market instruments CHAPTER 2 Capital market instruments Asset Classes and Financial Instruments Bonds Equity Securities Derivative Securities The Money Market 2-3 Table 2.1 Major

More information

Evergreen INSTITUTIONAL MONEY MARKET FUNDS. Prospectus July 1, 2009

Evergreen INSTITUTIONAL MONEY MARKET FUNDS. Prospectus July 1, 2009 Evergreen INSTITUTIONAL MONEY MARKET FUNDS Prospectus July 1, 2009 Evergreen Institutional 100% Treasury Money Market Fund Evergreen Institutional Money Market Fund Evergreen Institutional Municipal Money

More information

A Guide to Investing in Floating-rate Securities

A Guide to Investing in Floating-rate Securities A Guide to Investing in Floating-rate Securities What to know before you buy Are floating rate bonds suitable for you? The features, risks and characteristics of floating rate bonds are different from

More information

Federated Quality Bond Fund II

Federated Quality Bond Fund II Prospectus April 30, 2016 Share Class Primary Federated Quality Bond Fund II A Portfolio of Federated Insurance Series A mutual fund seeking to provide current income by investing in a diversified portfolio

More information

Mortgage-Backed Sector of the Bond Market

Mortgage-Backed Sector of the Bond Market 1 Mortgage-Backed Sector of the Bond Market LEARNING OUTCOMES 1. Mortgage Loan: a. cash flow characteristics of a fixed-rate, b. level payment, and c. fully amortized mortgage loan; 2. Mortgage Passthrough

More information

Seix Total Return Bond Fund

Seix Total Return Bond Fund Summary Prospectus Seix Total Return Bond Fund AUGUST 1, 2015 (AS REVISED FEBRUARY 1, 2016) Class / Ticker Symbol A / CBPSX R / SCBLX I / SAMFX IS / SAMZX Before you invest, you may want to review the

More information

RBC Fixed Income Funds Prospectus

RBC Fixed Income Funds Prospectus RBC Fixed Income Funds Prospectus July 29, 2016 RBC Short Duration Fixed Income Fund Class I: RSDIX Class F: RSHFX RBC Ultra-Short Fixed Income Fund Class I: RUSIX Class F: RULFX As with all mutual funds,

More information

GOLDMAN SACHS VARIABLE INSURANCE TRUST

GOLDMAN SACHS VARIABLE INSURANCE TRUST GOLDMAN SACHS VARIABLE INSURANCE TRUST Institutional and Service Shares of the Goldman Sachs Money Market Fund (the Fund ) Supplement dated July 29, 2015 to the Prospectuses and Summary Prospectuses, each

More information

DFA INVESTMENT DIMENSIONS GROUP INC.

DFA INVESTMENT DIMENSIONS GROUP INC. PROSPECTUS February 28, 2015 Please carefully read the important information it contains before investing. DFA INVESTMENT DIMENSIONS GROUP INC. DFA ONE-YEAR FIXED INCOME PORTFOLIO Ticker: DFIHX DFA TWO-YEAR

More information

Mortgages and Mortgage -Backed Securiti curi es ti Mortgage ort gage securitized mortgage- backed securities (MBSs) Primary Pri mary Mortgage Market

Mortgages and Mortgage -Backed Securiti curi es ti Mortgage ort gage securitized mortgage- backed securities (MBSs) Primary Pri mary Mortgage Market Mortgages and Mortgage-Backed Securities Mortgage Markets Mortgages are loans to individuals or businesses to purchase homes, land, or other real property Many mortgages are securitized Many mortgages

More information

Chapter. Investing in Bonds. 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds. 2010 South-Western, Cengage Learning

Chapter. Investing in Bonds. 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds. 2010 South-Western, Cengage Learning Chapter 13 Investing in Bonds 13.1 Evaluating Bonds 13.2 Buying and Selling Bonds 2010 South-Western, Cengage Learning Standards Standard 4.0 Investigate opportunities available for saving and investing.

More information

ALLOCATION STRATEGIES A, C, & I SHARES PROSPECTUS August 1, 2015

ALLOCATION STRATEGIES A, C, & I SHARES PROSPECTUS August 1, 2015 ALLOCATION STRATEGIES A, C, & I SHARES PROSPECTUS August 1, 2015 Investment Adviser: RidgeWorth Investments A Shares C Shares I Shares Aggressive Growth Allocation Strategy SLAAX CLVLX CVMGX Conservative

More information

Brokered certificates of deposits

Brokered certificates of deposits Brokered certificates of deposits A guide to what you should know before you buy Are brokered CDs right for you? Brokered CDs are designed for investors who: Want access to a wide selection of issuers

More information

Chapter 3 Fixed Income Securities

Chapter 3 Fixed Income Securities Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination

More information

City National Rochdale Municipal High Income Fund a series of City National Rochdale Funds

City National Rochdale Municipal High Income Fund a series of City National Rochdale Funds City National Rochdale Municipal High Income Fund a series of City National Rochdale Funds SUMMARY PROSPECTUS DATED JANUARY 31, 2016 Class: Servicing Class Class N Ticker: (CNRMX) (CNRNX) Before you invest,

More information

Mortgage-Backed Securities

Mortgage-Backed Securities Mortgage-Backed Securities PRIMER Introduction to Mortgage-Backed Securities (MBS) and Other Securitized Assets Executive Summary A large and diverse market The US mortgage market, with $7.2 trillion in

More information

MONEY MARKET FUND GLOSSARY

MONEY MARKET FUND GLOSSARY MONEY MARKET FUND GLOSSARY 1-day SEC yield: The calculation is similar to the 7-day Yield, only covering a one day time frame. To calculate the 1-day yield, take the net interest income earned by the fund

More information

Chapter 45. Primary and Secondary Mortgage Markets INTRODUCTION

Chapter 45. Primary and Secondary Mortgage Markets INTRODUCTION Chapter 45 Primary and Secondary Mortgage Markets INTRODUCTION The primary mortgage market brings prospective borrowers (market demand) together with individuals, agencies and entities that have money

More information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

GNMA Fund PRGMX. T. Rowe Price SUMMARY PROSPECTUS

GNMA Fund PRGMX. T. Rowe Price SUMMARY PROSPECTUS SUMMARY PROSPECTUS PRGMX October 1, 2015 T. Rowe Price GNMA Fund A bond fund seeking income and high overall credit quality through investments in mortgage-backed securities issued by the Government National

More information

Mortgage-Backed Securities. Mortgage Loans Pass-throughs and Prepayments CMOs Analysis of MBS Pricing and Convexity

Mortgage-Backed Securities. Mortgage Loans Pass-throughs and Prepayments CMOs Analysis of MBS Pricing and Convexity Mortgage-Backed Securities/1 Asset-Backed Securities Mortgage-Backed Securities Prof. Ian Giddy Stern School of Business New York University Mortgages and MBS Mortgage Loans Pass-throughs and Prepayments

More information

JPMorgan Insurance Trust Class 1 Shares

JPMorgan Insurance Trust Class 1 Shares Prospectus JPMorgan Insurance Trust Class 1 Shares May 1, 2016 JPMorgan Insurance Trust Core Bond Portfolio* * The Portfolio does not have an exchange ticker symbol. The Securities and Exchange Commission

More information

Glossary of Common Derivatives Terms

Glossary of Common Derivatives Terms DRAFT: 10/03/07 Glossary of Common Derivatives Terms American Depository Receipts (ADRs). ADRs are receipts issued by a U.S. bank or trust company evidencing its ownership of underlying foreign securities.

More information

Mortgage-backed Securities

Mortgage-backed Securities MÄLARDALEN UNIVERSITY PROJECT DEPARTMENT OF MATHEMATICS AND PHYSICS ANALYTICAL FINANCE, MT 1411 TEACHER: JAN RÖMAN 2004-12-16 Mortgage-backed Securities GROUP : CAROLINA OLSSON REBECCA NYGÅRDS-KERS ABSTRACT

More information

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below 1. Determine the value of the following risk-free debt instrument, which promises to make the respective

More information

An actively managed approach for today s fixed-income markets

An actively managed approach for today s fixed-income markets Q3 2015 Putnam multi-sector fixed-income funds An actively managed approach for today s fixed-income markets D. William Kohli Michael V. Salm Paul D. Scanlon, CFA Putnam s three Co-Heads of Fixed each

More information

State Street Institutional Investment Trust SUPPLEMENT DATED MAY 23, 2016

State Street Institutional Investment Trust SUPPLEMENT DATED MAY 23, 2016 State Street Institutional Investment Trust SUPPLEMENT DATED MAY 23, 2016 TO PROSPECTUSES, SUMMARY PROSPECTUSES AND STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 29, 2016 STATE STREET INSTITUTIONAL LIQUID

More information

Federated U.S. Government Securities Fund: 1-3 Years

Federated U.S. Government Securities Fund: 1-3 Years Prospectus April 30, 2016 Share Class Institutional Service Y Ticker FSGVX FSGIX FSGTX Federated U.S. Government Securities Fund: 1-3 Years The information contained herein relates to all classes of the

More information

Understanding duration and convexity of fixed income securities. Vinod Kothari

Understanding duration and convexity of fixed income securities. Vinod Kothari Understanding duration and convexity of fixed income securities Vinod Kothari Notation y : yield p: price of the bond T: total maturity of the bond t: any given time during T C t : D m : Cashflow from

More information

Collateralized mortgage obligations (CMOs)

Collateralized mortgage obligations (CMOs) Collateralized mortgage obligations (CMOs) Fixed-income investments secured by mortgage payments An overview of CMOs The goal of CMOs is to provide reliable income passed from mortgage payments. In general,

More information

Answers to Concepts in Review

Answers to Concepts in Review Answers to Concepts in Review 1. Bonds are appealing to investors because they provide a generous amount of current income and they can often generate large capital gains. These two sources of income together

More information

Financial-Institutions Management. Solutions 6

Financial-Institutions Management. Solutions 6 Solutions 6 Chapter 25: Loan Sales 2. A bank has made a three-year $10 million loan that pays annual interest of 8 percent. The principal is due at the end of the third year. a. The bank is willing to

More information

State Street Institutional Investment Trust

State Street Institutional Investment Trust Prospectus Dated April 29, 2016, as revised August 26, 2016 State Street Institutional Investment Trust State Street Institutional U.S. Government Money Market Fund Institutional Class (SAHXX) Administration

More information

UBS RMA Money Market Portfolio U.S. Government Portfolio Tax-Free Fund California Municipal Money Fund New York Municipal Money Fund

UBS RMA Money Market Portfolio U.S. Government Portfolio Tax-Free Fund California Municipal Money Fund New York Municipal Money Fund Money Market Funds Prospectus UBS RMA Money Market Portfolio U.S. Government Portfolio Tax-Free Fund California Municipal Money Fund New York Municipal Money Fund Prospectus August 28, 2015 Ticker symbols:

More information

Assumable mortgage: A mortgage that can be transferred from a seller to a buyer. The buyer then takes over payment of an existing loan.

Assumable mortgage: A mortgage that can be transferred from a seller to a buyer. The buyer then takes over payment of an existing loan. MORTGAGE GLOSSARY Adjustable Rate Mortgage (ARM): A mortgage loan with payments usually lower than a fixed rate initially, but is subject to changes in interest rates. There are a variety of ARMs that

More information

Chapter 3 - Selecting Investments in a Global Market

Chapter 3 - Selecting Investments in a Global Market Chapter 3 - Selecting Investments in a Global Market Questions to be answered: Why should investors have a global perspective regarding their investments? What has happened to the relative size of U.S.

More information

Pioneer Bond Fund. Performance Analysis & Commentary September 2015. Fund Ticker Symbols: PIOBX (Class A); PICYX (Class Y) us.pioneerinvestments.

Pioneer Bond Fund. Performance Analysis & Commentary September 2015. Fund Ticker Symbols: PIOBX (Class A); PICYX (Class Y) us.pioneerinvestments. Pioneer Bond Fund COMMENTARY Performance Analysis & Commentary September 2015 Fund Ticker Symbols: PIOBX (Class A); PICYX (Class Y) us.pioneerinvestments.com Third Quarter Review Pioneer Bond Fund s Class

More information

Understanding Fixed Income

Understanding Fixed Income Understanding Fixed Income 2014 AMP Capital Investors Limited ABN 59 001 777 591 AFSL 232497 Understanding Fixed Income About fixed income at AMP Capital Our global presence helps us deliver outstanding

More information

Brown Advisory Strategic Bond Fund Class/Ticker: Institutional Shares / (Not Available for Sale)

Brown Advisory Strategic Bond Fund Class/Ticker: Institutional Shares / (Not Available for Sale) Summary Prospectus October 30, 2015 Brown Advisory Strategic Bond Fund Class/Ticker: Institutional Shares / (Not Available for Sale) Before you invest, you may want to review the Fund s Prospectus, which

More information

Federated MDT Mid Cap Growth Strategies Fund

Federated MDT Mid Cap Growth Strategies Fund Statement of Additional Information December 31, 2015 Share Class A B C R Institutional Ticker FGSAX FGSBX FGSCX FGSKX FGSIX Federated MDT Mid Cap Growth Strategies Fund A Portfolio of Federated Equity

More information

American Options and Callable Bonds

American Options and Callable Bonds American Options and Callable Bonds American Options Valuing an American Call on a Coupon Bond Valuing a Callable Bond Concepts and Buzzwords Interest Rate Sensitivity of a Callable Bond exercise policy

More information

CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3-month T-bill: ( 100,000 97,645 )4 1 = 1.02412 4 1 =.10 or 10% b. Effective annual interest rate on coupon bond paying 5% semiannually:

More information

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 9-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as

More information

Federated Total Return Government Bond Fund

Federated Total Return Government Bond Fund Summary Prospectus April 30, 2016 Share Class Institutional Service Ticker FTRGX FTGSX Federated Total Return Government Bond Fund Before you invest, you may want to review the Fund s Prospectus, which

More information

ANALYSIS OF FIXED INCOME SECURITIES

ANALYSIS OF FIXED INCOME SECURITIES ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its

More information

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

More information

Weekly Relative Value

Weekly Relative Value Back to the Basics Overview of Hybrid ARMS Many credit unions are now faced with declining income and net interest margin compression caused by low interest rates and weak loan demand. This has lead to

More information

Licensed by the California Department of Corporations as an Investment Advisor

Licensed by the California Department of Corporations as an Investment Advisor Licensed by the California Department of Corporations as an Investment Advisor The Impact of the Alternative Minimum Tax (AMT) on Leverage Benefits My associate Matthias Schoener has pointed out to me

More information

Ginnie Mae and the Secondary Mortgage Market: an Integral Part of the American Economic Engine

Ginnie Mae and the Secondary Mortgage Market: an Integral Part of the American Economic Engine Ginnie Mae and the Secondary Mortgage Market: an Integral Part of the American Economic Engine Frank J. Fabozzi, Ph.D., CFA Adjunct Professor of Finance School of Management Yale University Government

More information

Federated Quality Bond Fund II

Federated Quality Bond Fund II Summary Prospectus April 30, 2015 Share Class Primary Federated Quality Bond Fund II A Portfolio of Federated Insurance Series Before you invest, you may want to review the Fund s Prospectus, which contains

More information

Overview of Mortgage Lending

Overview of Mortgage Lending Chapter 1 Overview of Mortgage Lending 1 Chapter Objectives Identify historical events affecting today s mortgage industry. Contrast the primary mortgage market and secondary mortgage market. Identify

More information

Is it time to hire a professional to manage your bonds?

Is it time to hire a professional to manage your bonds? Is it time to hire a professional to manage your bonds? Today s bond markets are more complex Finding the right bonds can be difficult. The bond markets are large and complex, and it takes a lot of homework

More information

TD ASSET MANAGEMENT USA FUNDS INC. TDAM Institutional Money Market Fund TDAM Institutional Municipal Money Market Fund

TD ASSET MANAGEMENT USA FUNDS INC. TDAM Institutional Money Market Fund TDAM Institutional Municipal Money Market Fund TD ASSET MANAGEMENT USA FUNDS INC. TDAM Institutional Money Market Fund TDAM Institutional Municipal Money Market Fund (together, the Funds and each, a Fund ) Supplement dated June 24, 2016 to the Summary

More information

CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial

More information

Exit Strategies for Fixed Rate Financing. Comparing Yield Maintenance and Defeasance Alternatives. by Regan Campbell and Jehane Walsh

Exit Strategies for Fixed Rate Financing. Comparing Yield Maintenance and Defeasance Alternatives. by Regan Campbell and Jehane Walsh Defeasance Vs. Yield Maintenance Exit Strategies for Fixed Rate Financing Comparing Yield Maintenance and Defeasance Alternatives by Regan Campbell and Jehane Walsh When looking to refinance or sell a

More information

SSI 1 - INTRODUCTION TO CREDIT UNION FINANCIAL MANAGEMENT

SSI 1 - INTRODUCTION TO CREDIT UNION FINANCIAL MANAGEMENT Sponsored by Catalyst Corporate FCU 1 Sponsored by Catalyst Corporate FCU SSI 1 - INTRODUCTION TO CREDIT UNION FINANCIAL MANAGEMENT Reviews the basic financial components and variables that impact credit

More information

Preparing Your Fixed Income Portfolio for Rising Interest Rates

Preparing Your Fixed Income Portfolio for Rising Interest Rates fixed income portfolio august 2013 2 Bond Fundamentals 3 Products to Hedge Interest Rates 4 Strategies to Mitigate the Effect of Rising Rates 6 Investment Considerations Preparing Your Fixed Income Portfolio

More information

Omgeo Asset Class Coverage

Omgeo Asset Class Coverage Equity Ownership interest in a corporation in the form of common stock or preferred stock. Common Stock American Depositary Receipts (ADR) Global Depositary Receipts (GDR) Exchange Traded Funds (ETF) As

More information

Bond Fund of the TIAA-CREF Life Funds

Bond Fund of the TIAA-CREF Life Funds Summary Prospectus MAY 1, 2015 Bond Fund of the TIAA-CREF Life Funds Ticker: TLBDX Before you invest, you may want to review the Fund s prospectus, which contains more information about the Fund and its

More information

OPTIONALITY: UNDERSTANDING CALLABLE BONDS

OPTIONALITY: UNDERSTANDING CALLABLE BONDS OPTIONALITY: UNDERSTANDING CALLABLE BONDS RBC GAM Fundamental Series RBC GAM Fundamental Series Optionality: Understanding Callable Bonds 1 Introduction While callable notes often have the same credit

More information

CHAPTER 9 DEBT SECURITIES. by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA

CHAPTER 9 DEBT SECURITIES. by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA CHAPTER 9 DEBT SECURITIES by Lee M. Dunham, PhD, CFA, and Vijay Singal, PhD, CFA LEARNING OUTCOMES After completing this chapter, you should be able to do the following: a Identify issuers of debt securities;

More information

STATE STREET INSTITUTIONAL INVESTMENT TRUST. Supplement Dated January 30, 2014. Prospectus Dated April 30, 2013

STATE STREET INSTITUTIONAL INVESTMENT TRUST. Supplement Dated January 30, 2014. Prospectus Dated April 30, 2013 STATE STREET INSTITUTIONAL INVESTMENT TRUST Supplement Dated January 30, 2014 Prospectus Dated April 30, 2013 State Street Institutional U.S. Government Money Market Fund State Street Institutional Treasury

More information

Investment and Portfolio Management. Lecture 8 Bond Prices and Yields. Bond Characteristics

Investment and Portfolio Management. Lecture 8 Bond Prices and Yields. Bond Characteristics Investment and Portfolio Management Ms. Pham Le Thu Nga Lecture 8 Bond Prices and Yields Chapter 14 14-2 Bond Characteristics Face or par value (normally bullet maturity) Coupon rate (normally fixed) Zero

More information

Mortgage Backed Securities. Masaryk University 2014- Brno, CZ

Mortgage Backed Securities. Masaryk University 2014- Brno, CZ Mortgage Backed Securities Masaryk University 2014- Brno, CZ Authored by: Vukman Manić Supervised by: Luděk Benada 12/6/2014 AGENDA 1. Introduction- Mortgage Backed Securities (MBS) 2. The MBS Market-

More information

Federated New York Municipal Income Fund

Federated New York Municipal Income Fund Summary Prospectus October 31, 2015 Share Class A B Ticker NYIFX NYIBX Federated New York Municipal Income Fund A Portfolio of Federated Municipal Securities Income Trust Before you invest, you may want

More information

Northwest Bancshares, Inc. Announces Quarterly Earnings and Dividend Declaration

Northwest Bancshares, Inc. Announces Quarterly Earnings and Dividend Declaration EARNINGS RELEASE FOR IMMEDIATE RELEASE Contact: William J. Wagner, President and Chief Executive Officer (814) 726-2140 William W. Harvey, Jr., Executive Vice President and Chief Financial Officer (814)

More information

1. General Obligation Bonds (G.O.s): Bonds backed by the full taxing power of the issuer.

1. General Obligation Bonds (G.O.s): Bonds backed by the full taxing power of the issuer. S&P INDICES Fixed Income February 2010 S&P Fixed Income Indices: Municipal Bond Investor Tool Kit Key Terms Alternative Minimum Tax (AMT): An extra tax that some taxpayers are required to pay in addition

More information

investor s guide mortgage-backed securities (MBS) and collateralized mortgage obligations

investor s guide mortgage-backed securities (MBS) and collateralized mortgage obligations investor s guide mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) C O N T E N T S Securitization: An Overview 1 Mortgage Securities: An Overview 2 The Building Blocks of

More information

Third Quarter 2015 Earnings Conference Call November 4, 2015

Third Quarter 2015 Earnings Conference Call November 4, 2015 Third Quarter 2015 Earnings Conference Call November 4, 2015 Important Notice Forward-Looking Statements This presentation contains forward-looking statements within the meaning of the safe harbor provisions

More information

Federated Floating Rate Strategic Income Fund

Federated Floating Rate Strategic Income Fund Prospectus May 31, 2012 Share Class Ticker A FRSAX Institutional FFRSX The information contained herein relates to all classes of the Fund s Shares, as listed below, unless otherwise noted. Federated Floating

More information

Figure 10.1 Listing of Treasury Issues

Figure 10.1 Listing of Treasury Issues CHAPER 10 Bond Prices and Yields 10.1 BOND CHARACERISICS Bond Characteristics reasury Notes and Bonds Face or par value Coupon rate Zero coupon bond Compounding and payments Accrued Interest Indenture

More information

Recourse vs. Nonrecourse: Commercial Real Estate Financing Which One is Right for You?

Recourse vs. Nonrecourse: Commercial Real Estate Financing Which One is Right for You? Recourse vs. Nonrecourse: Commercial Real Estate Financing Which One is Right for You? Prepared by Bill White Director of Commercial Real Estate Lending In this white paper 1 Commercial real estate lenders

More information

LOS 56.a: Explain steps in the bond valuation process.

LOS 56.a: Explain steps in the bond valuation process. The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

More information

Analytical Research Series

Analytical Research Series EUROPEAN FIXED INCOME RESEARCH Analytical Research Series INTRODUCTION TO ASSET SWAPS Dominic O Kane January 2000 Lehman Brothers International (Europe) Pub Code 403 Summary An asset swap is a synthetic

More information

Corporate System Resolution Cause of the Corporate System Crisis Frequently Asked Questions (FAQs)

Corporate System Resolution Cause of the Corporate System Crisis Frequently Asked Questions (FAQs) 1 Corporate System Resolution Cause of the Corporate System Crisis Frequently Asked Questions (FAQs) 1. What does this FAQ cover? This document takes a look at the types of investments that were held by

More information