Tuesday, August 15, 2017
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Robert Brickson • Kevin Doyle • Lonnie Harris • Larry Russell •  Mark Tranckino • Robert Schuyler  Tom Toburen • Josh Kiefer • Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
8/8/17	1.00	1.06	1.16	1.24	1.36	1.53	1.84	2.10	2.29	2.63	2.86
8/9/17	1.01	1.06	1.15	1.21	1.33	1.50	1.81	2.06	2.24	2.59	2.82
8/10/17	1.02	1.05	1.14	1.22	1.33	1.49	1.78	2.03	2.20	2.55	2.79
8/11/17	.99	1.03	1.14	1.21	1.30	1.43	1.74	2.00	2.19	2.55	2.79
8/14/17	.95	1.02	1.13	1.23	1.33	1.48	1.77	2.04	2.22	2.57	2.81

              Source: U.S. Department of the Treasury, as of 8/14/17

Your Give Up Yield Is Your Borrowing Cost

 

In fixed income parlance the following terms are synonymous:

 

Give Up Yield  / Market Yield / Take Out Yield /  Hurdle Rate

 

And each of them approximates your borrowing cost.  Thus the maxim “Your give up yield is your borrowing cost.”   Here’s the math behind it.

 

Assume the following:

• You need $1mm funding for a project/investment/loan

• You own $1mm par value US Treasury 3.00% Aug 2018 @ 100-00 to yield 3.00%

• You can borrow for one year fixed @ 1.50% (pledging the Treasury as collateral)

 

What should you do? Borrow or sell the bond?

 

To answer this question you must first determine the most cost effective path. This is easily illustrated with a schedule of comparative cashflows and sale proceeds:

 

• Cost to borrow: <$15,000> and keep the bond which earns $30,000 over the next year. Net income $15,000

• Or, sell the bond at market price of 101.750, recognizing an immediate gain of $17,500. The market yield produced by the 101.750 dollar price is 1.25%. Net income $17,500

• Advantage: Sell the bond, take the gain, earn $2,500 more than keeping the bond and borrowing.

 

Thus, it is said, your borrowing cost is 1.25% because that is the net explicit cost of foregone income on the bond vs. holding the bond to maturity ($30,000 - $17,500 = $12,500).  It is also your hurdle rate – suggesting that  you’ll earn more than your original income scenario (+30,000) if your next project/investment/loan earns better than 1.25%

 

So…your market yield = take out yield = give up yield = hurdle rate = borrow cost

 

Are you looking for relatively inexpensive funding?  If so, your bond portfolio may very well be the best path.  For more discussion on this or any other bond topic, please call your CCB Capital Markets representative.

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

•Not FDIC Insured •No Bank Guarantee •May Lose Value