How To Sell Bonds - Bond Selling To Banks, Credit Unions

Welcome to your subscribed Email Newsletter from American Investment Training.

This issue deals with working with institutions. How to connect with them, build a relationship and then sell to them.

Big Money and very high client retention.

Institutions for the purpose of this notification include:

Banks

Credit Unions

Trust Companies

and more!

Institutions buy bonds. They have to. Banks and credit unions have to do 1 of 2 things with the deposit money they collect:

Invest in bonds or Loan to their customers. When loan demand is down - Investment buying goes up!  and you want to be the guy or girl they call! And the other good part is when loan demand is up, they look to sell these bonds. Either way, you earn money for the trade!

However, most of these institutions have a board of directors and brokers must get approved. So, you need to know how to get in.

American Investment Training has created a fabulous - straight to the point ebook titled:

HOW TO SELL TO INSTITUTIONS

Includes where to find them, how to get in, and a bond education section to get you started. They don't just buy any bonds. 90% of the purchases are Government Bonds or Agencies of the Government. So, there is no credit risk with these investments. It's all relationship so get in on it! 

$1 million dollar trades are normal and routine. When you have a $300 million portfolio like many of them do, they don't waste their time with small trades.

GET IN ON THIS MARKET OR AT LEAST KNOW HOW TO!

Follow this link to learn more:

SELLING BONDS TO INSTITUTIONS

Get the edge. Email delivery in PDF

Thank You

American Investment Training

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Thank You!

American Investment Training

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Hello all and I hope you have a profitable new year in 2013

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Thank You

American Investment Training

Mortgage Backed Securities PSA Model - PSA Prepayments

PSA Prepayment Model

The PSA is a numerical scale that is used to measure the rate of principal prepayments on MBSs and to make assumptions on the future rate of prepayments. The PSA assumes that homeowners tend to make very little prepayments in the first several months of homeownership, make a steadily increasing amount of prepayments each month out to twoand- a-half years, and (beyond 2.5 years) prepayments continue at a constant rate over the remaining life of the pool. Specifically, the basic PSA model assumes of 0.2% annual prepayment in month 1, 0.4% annual prepayment in month 2, 0.6% prepayment in month 3, etc. The model increases prepayments by 0.2% (annualized) each month out to 30 months, and then levels out at an annualized rate of 6% prepayment per year thereafter. Logically, this prepayment pattern makes sense. A new homebuyer has typically just spent a thousand dollars inclosing costs and down payment to buy their house. This new homeowner usually wants to spend some additional dollars on home improvements or new furniture etc. However, after being in their home several years, they may have gotten a promotion, or need more space, or found out they didn’t really like the neighborhood. So, the basic PSA model takes these tendencies into account. The PSA prepayments are expressed as a percentage of this base model.

If a MBS has principal prepayments each month dollar and penny for penny at exactly the same rate as the model, the MBS is said to be prepaying at a rate of 100% PSA. If the prepayment cash-flow are twice the amount of the base model, then prepayments would be at 200%PSA; if they are 10 times as fast, 1000% PSA, if only half as much, 50% PSA etc. If the homeowners do not make any prepayments, the collateral is said to be paying at 0% PSA.

FORECASTING PREPAYMENTS

Obviously, the PSA and CPR can be used to analyze actual prepayment history on a specific pool, but more importantly, the PSA and CPR are used to analyze projected future cash-flows, average live, maturity, and yield to evaluate a specific pool prior to purchase. In order to do this, an assumption of future prepayment activity must be made.

Opposed to simply guessing about future prepayments, there are three tangible sources of information that can be used to help formulate a prepayment assumption (forecast): Review the actual prepayment history of the MBS; review the prepayments histories of other similar MBSs; review the prepayments histories of other similar MBSs; review the forecasts of the mortgage securities experts on Wall Street ( this is often referred to as the “street assumption” or “Bloomberg Median”). These sources of prepayment history and forecasts are reviewed and then the investor applies his/her feeling about the direction of interest rates and mortgage rates, and therefore, the possibility of the homeowners wanting to refinance their mortgages. Then, a reasonable and supportable prepayment assumption can be made.

Step Up Bonds

A STEP-UP Agency debenture is a bond that has a fixed coupon rate for a period of time. It is then available to be “called” (redeemed @par) by the issuing Agency. If the note is not called, the coupon will then STEP-UP (adjust) to a new coupon rate. These various coupons and the amount of time between the step dates are established at the issuance and will not be changed over the life of the bond. (A Step-Up Bond is not considered a true floating rate security because the coupons are pre-determined at issuance and do not “float” against a market index).

Step Up Bond Example: FHLB STEP -UP: 12/31/2002-97

Opening coupon = 5.50% Callable: 12/31/97 (or anytime thereafter) Step coupon=7.00% Price @ issuance = PAR Yield to the call = 5.50% Yield to maturity=6.25% Keep in mind that each STEP-UP bond will have its own specific call features and coupon step-up features. Some recent issues have had multiple step-up dates with the coupon rate changing each year through maturity if he bond is not called. In any event, the best method of evaluation is to examine the effective yield to each available call date (taking into account the multiple coupons) and then comparing to alternative investments.

Dula Indexed Floater Bonds

A DUAL-INDEXED FLOATER is a floating rate Agency bond whose coupon is reset using a COMBINATION of two indexes, one subtracted from the other, and then adding some number of basis points. One is a long term index the other a short term index.

Example: coupon=(10 year Treasury Rate MINUS 1 month Libor)+250 Basis Points If the 10 year Treasury is 6% and 1 month Libor is 3% coupon= (6%-3%) + 2.50% = 5.50%

The key to a DUAL-INDEX floater is the basis point spread between the two indexes. In our above example, the difference between long term rates (the 10 year Treasury Rate) and short term rates (the 1 month Libor) is 3%. If the yield curve “flattens” and this spread “tightens” then the coupon on the floater will go down:

Example: 10 year CMT goes up to 7% and 1 month LIBOR goes up to 4.50% (long term rates up 100 Bps, and short term rates up 150 Bps) coupon = (7%-4.50%)+2.50%=5%

In this scenario, the general level of interest rates has gone up but the Dual-Indexed Floater’s coupon has gone down, because the yield curve has flattened. If the yield curve becomes more steep (the spread between the two indexes becomes greater), then the coupon on a Dual-Indexed Floater will go up. In effect, this floater’s coupon is a reflection of “steepness” of the yield curve more than a reflection of the general direction of interest rates. For this reason, DUAL-INDEXED Floaters are sometimes called Yield Curve Anticipation Notes (“YCANs”).

Inverse Floater Bonds

An INVERSE FLOATER Agency debenture is also a bond whose coupon rate will float with the market.

As the name implies, an Inverse Floater’s coupon moves in the opposite direction of the index. Simply put, if the general level of floating coupon is accomplished in one of two methods. First the coupon will be set by subtracting an index from a fixed rate:

Example: Coupon= (14%-1 mo. LIBOR) If the Libor rate is 3.00% coupon=14%-3%=11% If the Libor rate goes UP to 4% coupon=14%-4%=10%

As you can see the general level of interest rates is rising but the coupon on this Floater is going down, hence the name “Inverse Floater”. The other method of generating an Inverse Floater’s coupon is by multiplying an index against a negative # (called a negative multiplier) and adding some number of basis points. For example:

Example: coupon = (-1.5*1 mo. Libor) + 1500 Basis Points If the Libor rate is 3.00% coupon = (-1.5*3.00%)+15.00%=10.50% If the Libor rate goes UP to 4.00% coupon = (-1.5*4.00%)+15.00%=9.00%

Again, the general level of interest rates is rising but because of the negative multiplier, the coupon of the Inverse Floater’s interest rate is going down.

Government Agency Bonds

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