Master Bond Swaps

By Pickering, C. J. | Independent Banker, October 1997 | Go to article overview

Master Bond Swaps


Pickering, C. J., Independent Banker


Learn take-out yield and improve your portfolio's performance

Bond swaps have once again become one of the bank portfolio manager's most popular management techniques. They fell out of favor a few years back when the sale of any bond for any reason was a signal for bank examiners to question whether the bank was "trading." If examiners decided a bank was trading, the bank might be required to mark the entire bank portfolio to market and to deduct any losses against the bank's regulatory capital. As you can imagine, most banks quit selling bondsperiod.

The passage of Financial Accounting Standard 115 (mark-tomarket accounting) clarified the difference between trading and the active management of a bank's available-for-sale investment portfolio. The Office of the Comptroller of the Currency's Owen Carney said it best when he commented that trading is the purchase and sale of securities, whether over the course of minutes or days, to take advantage of imminent market moves. A purchase and subsequent sale that takes place over the course of weeks or months is not really trading.

In other words, the FAS 115 definitions of trading versus availablefor-sale allow bankers to once again use bond swaps to improve their portfolios' performances without running the risk of having their capital impaired.

This month's Bank Investments column shows how to decide when to try a bond swap and why. The column also attempts to explain "take-out yield," a very useful concept, but one that many bankers do not fully understand.

EXAMPLE BOND SWAPS

First of all, most good swaps will make sense intuitively, even before they are analyzed. Example 1 in Table I on page 15 shows that selling a three-year, 4.5 percent Treasury at a loss and repurchasing a three-year, 5 percent Treasury is a break-even trade, since the effective yields on the bond sold and the bond purchased are virtually identical. Any loss on the sale ($909) can be expected to be made up over the life of the replacement bond ($300 per year X 3 years = $900). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Master Bond Swaps
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.