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16 Cards in this Set
- Front
- Back
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What do SWAPs help? |
1. Lower financing costs 2. manage mismatches between CF due to differences in assets and liabilities 3. manage interest rate risk |
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Basis Risk |
When the swap you recived doesn't match what you pay to bond holders, so interest differs from period to period |
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Floating Rate Swap |
1. You issue fixed rate bonds but go into a deal to get floating rat 2. Would do this if the muni wants to make variable rate payments but doesn't want downside of variable rate debt |
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Downside of variable rate debt |
1. ARS- Liquidity problems 2. VRDO: Put options and tendered bonds cost to be remarketed |
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Basis Swap aka Floating to floating |
1. SIFMA and LIBOR are swaped 2. You may use this to hedge against potential negative effects of tax law changes |
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Interest Rate SWAP |
1. Vanilla swap 2. aka synthetic fixed rate, fixed rate or floating to fixed rate swap |
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Speculative Strategy |
when a muni is expecting to make money on a change in the value of a swap due to change in the IR and is not using it to protect against IR risk |
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Hedging Strategy |
1. When a muni has issued bonds and has engaged in a swap to lower IR risk |
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Market to market |
1. the value of a swap given current IR aka the termination value |
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Net settlement amount formula |
payment= (notional amount) x (variable rate-fixed rate) x (days/360) |
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ISDA (International swaps and derivative association master agreement |
A document that puts all the terms and conditions of the swap |
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counterparty risk |
Counter party will default on payment or credit quality will decline so much that there is fear of default, bond holders are exposed to risk |
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Termination Risk |
some swap agreements allow party to cancel it given certain conditions ex. detriot got downgraded, UBS canceled swap, Detriot had to pay fines |
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Collateral Risk |
ISDA may require munis to provide collateral if swap agreement becomes unblanced, they are downgraded, or they file for bankruptcy |
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Market risk |
Issuer may not be able to obtail favorable contract in the future if swap term is shortern thatn the term of the bonds |
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Forward Swap |
IR swap where exchange is in the future ex. if a muni can't advance refund and they thinks that IR will go down for 2 years then start to increase, they want to take advantage of the low rates now, but lock in the swap to start in 3 years |
