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An Introduction to Derivative Securities, Financial Markets, and Risk ManagementAdvanced Financial Risk Management, 2nd ed.

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Stress testing-based risk management analysis is now a critical element of financial institutions’ financial strategy. Stress testing regimes like the Federal Reserve’s 2014 Comprehensive Capital Analysis and Review require a five step process:

  1. Macro-economic factors are shifted
  2. Default probabilities of all counterparties move in response
  3. Credit spreads of all counterparties move in response
  4. Valuations of all extensions of credit then shift
  5. The institution’s own default risk, capital position, and liquidity position shift as well

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This analysis is an updated bond market view of General Electric Company (GE), one of the most complex conglomerates in the world. General Electric completed the initial public offering of its credit card unit Synchrony Financial (SYF) in July, 2014. How does the bond market view General Electric and its key subsidiary General Electric Capital Corporation in light of the spin-off? We answer that question in this note.

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Kamakura Corporation projections for U.S. Treasuries and fixed rate mortgages this week show that the implied forward yields for 15 year fixed rate mortgages rise from a current effective yield of 3.442% (up 0.11% from last week) to 5.548% in 10 years, up 0.094% from last week. The all-in yield on 30 year fixed rate mortgages was up 0.11% at 4.272%, after the rise in long term Treasury yields of 0.06% to 0.10% at maturities from 5 to 30 years. The value of net servicing for 30 year fixed rate mortgages rose 0.36% this week. Here are the highlights of this week's implied forecast:

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On September 9, we compared the marginal cost of wholesale funding for Bank of America Corporation (BAC) with the U.S. Dollar Cost of Funds IndexTM, a proxy for the marginal cost of funding for the 4 largest U.S. deposit-taking banks. We found that Bank of America’s marginal cost of funds was 0.134% higher than the composite of the 4 “Too Big to Fail” banks and about 0.30% higher than Wells Fargo & Co. (WFC). A number of readers asked “what does this mean to Warren Buffett?” Accordingly, in this note we compare the marginal cost of funding for two Berkshire Hathaway (BRK.A)(BRK.B) legal entities with the U.S. Dollar Cost of Funds Index, Bank of America Corporation, and Wells Fargo & Co. We keep tongue firmly in cheek for the entirety of this exercise.

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Kamakura Corporation projections for U.S. Treasuries and fixed rate mortgagesthis week show that the implied forward yields for 15 year fixed rate mortgages rise from a current effective yield of 3.332% (up 0.02% from last week) to 5.454% in 10 years, up 0.029% from last week. The all-in yield on 30 year fixed rate mortgages was up 0.02 at 4.162%, after the rise in long term Treasury yields of 0.06% to 0.09% at maturities from 3 to 30 years. The value of net servicing for 30 year fixed rate mortgages rose 0.13% this week. Here are the highlights of this week's implied forecast:

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