Bonds Cheat Sheet
by irishbear44 via cheatography.com/66448/cs/19297/
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
Security Type
U.S. Treasury
Bills/Notes/Bonds
Lowest credit risk/l‐
owest 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 eligib‐
ility
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
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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
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)
Bond Price See Saw
