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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

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

August 12, 2014
Kinder Morgan Energy Partners Leads the 20 Best Value Bond Trades with Maturities of 10 Years or More

August 11, 2014
Measuring the Funding Costs of the Too Big to Fail Banks:
The U.S. Dollar Cost of Funds Index™


August 8, 2014
Forward 1 Month T-Bill Rates Plunge 0.26% in 2 Years but Forward 10 Year U.S. Treasury Yield Drops Only 0.04% from Last Week

August 6, 2014
Credit Spreads and Default Probabilities: A Simple Model Validation Example

August 5, 2014
Vodafone Group PLC: Default Risk is Down Sharply But Value Ranks in the Bottom 10% of Bonds

July 30, 2014
American International Group Inc. Bonds:
A Reward to Risk Ratio Twice as High as the Median Bond Issue


July 29,2014
AT&T Inc. Bonds: Ten Times the Risk of IBM and Below Average Value

July 15, 2014
Brazil, Italy, Spain, Credit Default Swaps and the
European Commission Short Sale Ban, 2010-2014


July 14, 2014
Bank of America and MBIA Lead U.S. Bank Credit Default Swap Trading Volume, 2010-2014

March 19, 2014
Stress Testing and Interest Rate Risk Models: A Multi-Factor Stress Testing Example

March 13, 2014
Stress Testing: A Credit Spread Ranking of 12 U.S. and 12 International Banks

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A survey done a few years ago of the interest rate risk managers for the largest U.S. and Canadian banks confirmed some common elements in their approaches to asset and liability management. First, more than 90% of the respondents used just one yield curve as the “base yield curve” for valuation and profitability analysis. Second, this curve almost universally the U.S. dollar interest rate swap curve. Since that survey was taken, interest rate swap spreads have been negative at many maturities and massive fines have been paid by major banks for manipulation of Libor, the short term interest rate at the heart of interest rate swap spread setting. This note show how to improve the accuracy of transfer pricing and valuation in asset and liability management by eliminating the use of the interest rate swap curve, replacing it instead with the U.S. Dollar Cost of Funds IndexTM. We use traded bond price data for KeyBank N.A. and its parent KeyCorp to illustrate the process.

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In this note, we update ourAugust 12 study with more evidence of whether or not there is a funding advantage for the “too big to fail banks.” We use the Kamakura U.S. Dollar Cost of Funds Index TM, which represents the composite credit spreads of the four largest deposit-taking U.S. banks. Currently, four banking firms underlie the U.S. Dollar Cost of Funds Index: Bank of America (BAC), Citigroup (C), JPMorgan Chase & Co. (JPM), and Wells Fargo & Co. (WFC).

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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 3.327% (down 0.03% from last week) to 5.488% in 10 years, down 0.027% from last week. The all-in yield on 30 year fixed rate mortgages dropped 0.028% from last week to reach 4.170%, the same level as two weeks ago. The value of net servicing for both 15 and 30 year fixed rate mortgages was mixed relative to last week, with the value of net servicing dropping 0.34% for 30 year mortgages.

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In this note, we present some initial evidence of whether or not there is a funding advantage for the “too big to fail banks.” We use the Kamakura U.S. Dollar Cost of Funds IndexTM, which represents the composite credit spreads of the four largest deposit-taking U.S. banks. Currently, four banking firms underlie the U.S. Dollar Cost of Funds Index: Bank of America (BAC), Citigroup (C), JPMorgan Chase & Co. (JPM), and Wells Fargo & Co. (WFC).

Conclusion: One day’s trading evidence is not definitive, but we find that traded credit spreads were lower than the U.S. Cost of Funds Index for five of the seven “regional” banks with traded bonds on August 11, 2014. One of the other two banks, Ally Financial (ALLY), had traded credit spreads well above the U.S. Cost of Funds Index, but Ally Financial itself was the beneficiary of a rescue by the U.S. government.

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We last ranked the best value 10 year fixed rate corporate bond issues on August 4, 2014. Today we rank the best value corporate bond trades with daily trading volume of at least $5 million and maturities of 10 years or longer on August 11, 2014. On August 11 in the U.S. bond market, there were 15,965 bond trades in 2,959 senior non-call fixed rate corporate bond issues representing $3.8 billion in notional principal. Which 20 trades were the best trades of the day, and how do we decide the answer to that question? Today, we answer those questions for bonds with maturities of 10 years or longer.

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