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

 Blog Entries

Kamakura Corporation Named to World Finance 100

October 1, 2014
Citigroup Inc.: Default Risk Drops Sharply and Bonds Remain Solid Value

September 24, 2014
Stress Testing, Default Risk, and Bond Trading Volume

September 23, 2014
General Electric Capital Corporation: Bond Default Risk Falls but the Brand Name Premium Does Not

September 19, 2014
Primary Mortgage Yields Rise 0.11% and 30 Year Fixed Rate Mortgage Servicing Values Rise 0.36% This Week

September 13, 2014
Comparing the Marginal Cost of Funds for Berkshire Hathaway with BAC and WFC

September 11, 2014
Primary Mortgage Yields Rise 0.02% and 30 Year Fixed Rate Mortgage Servicing Values Rise 0.13% This Week

September 10, 2014
Bank of America: A Pre-Stress Test Credit Risk Report Shows Dramatic Progress

September 9, 2014
Bank of America and Its High Marginal Cost of Funds

September 8, 2014
Royal Dutch Shell Bond Issue Leads the 20 Best Value Bond Trades with Maturities of 1 Year or More

September 4, 2014
Forward 1 Month T-bill Curve Twists, Jumps 0.16% to Peak at 3.33% in February, 2021

August 26, 2014
Transfer Pricing and Valuation Yield Curves without Swap Data: A KeyBank and KeyCorp Example

August 18, 2014
More Evidence on the Funding “Subsidy” of the Too Big to Fail Banks

August 14, 2014
Mortgage Servicing Rights Values Close Mixed for the Week as Current and Forward Mortgage Rates Drop 0.03%

August 13, 2014
Liquidity At Risk – A stochastic look at cashflows

August 12, 2014
Five of Seven Regional Banks Trade at Credit Spreads Better than the Too Big to Fail Banks



Kamakura Blog


Kamakura’s troubled company index showed a new record for all-time best credit conditions on August 4, 2014. The massive credit crisis lawsuits against the largest banks in the land are steadily moving toward resolution. At the same time, the new top management team at Citigroup has been pruning its world-wide businesses to restore the firm to profitability. In light of these developments, we review traded bond prices of both Citigroup Inc. (C) and its financial services peers to reach conclusions about these questions:

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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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