5 ms·

Welcome to a non-zero interest rate environment. "$100m equivalent today" is not $100m -- the term to search for is "net present value". These considerations ar

by kmod 4y ago

Welcome to a non-zero interest rate environment. "$100m equivalent today" is not $100m -- the term to search for is "net present value". These considerations are precisely what marking to market captures

s1artibartfast 4y ago
If those assets are in your hold to maturity portfolio, they are still worth $100m. This return is guaranteed unless the Federal Bank defaults on those treasuries.
- kmod 4y ago
  $100m future dollars, which are less valuable than present dollars.
  - daveguy 4y ago
    That's hedging against inflation (which is definitely something they should have been doing for long term bonds). Interest rates directly affect the sale price of a bond, and it could have been hedged against, but it wasn't required. They won't do it unless it's required. Banks over 50 billion need to be regulated again (and they should lower it to 10 billion too).
  - s1artibartfast 4y ago
    $100m future dollars are still still $100m dollars. It is the value of the dollar that is changing, not the number of them that you hold. The day you are paid, you will still get handed exactly $100m million. Every day between now and then you will still have exactly $100m in bond holdings. How many cheeseburgers you can buy with that number of dollars may change from day to day, but the number of dollars will not.
    - morelisp 4y ago
      You don't need to appeal to cheeseburgers to not want to value 100 future dollars at 100 current dollars, if you can buy 100 future dollars for 80 current dollars, which is essentially what happened when rates rose. (Someone else is offering 100 future for 80 current because they have a forecast about cheeseburgers, sure. But you don't have to agree with that forecast to take their deal; the deal looks even better for you if you don't agree.)
      - s1artibartfast 4y ago
        The whole point of HTM as an asset class is that you dont plan to sell it. Think of how you would report a non-transferable asset with maturation on your balance sheet? How would you report savings in a CD with a steep early exit penalty? Herein lies the difference between a list of assets, and a list of asset liquidation value.
- bjacokes 4y ago
  You're saying that if a bank paid $100m for low-yielding bonds in 2021 which are now worth $80m, those bonds should be valued at $100m on the bank's balance sheet. What if a different bank pays $80m today for the same bonds? Should they be able to show an immediate $20m increase in their book value because those bonds are "worth $100m"?
  - prewett 4y ago
    The problem is that they are worth $100m if held to maturity (you get your $100m back, ergo their value is $100m if held to maturity), but the current price is $80m, because who wants to buy a bond at 0% when you could get around 5% at the next Treasury auction.
    - mikewarot 4y ago
      Not only that, but the value could drop even more if an inflationary spiral happens... Bank prime loan rates have been higher than 20% in the past, which means a $100m bond 5 years out could go as low as $33m in value... a 67% haircut! Clearly, US Treasuries carry risk that's not been accounted for.
      - landemva 4y ago
        > US Treasuries carry risk that's not been accounted for. US treasury debt is approximately the safest. The risk was that SVB might need cash before the bonds matured. The regulations encouraged SBV to do this. Now the Fed put is re-imagined, and we shuffle on while mumbling 'nobody could have imagined'.
    - bjacokes 4y ago
      They're worth $80m today, and then maybe $82m next year, $84m the year after, and so on until they're worth $100m at maturity. (Obviously these numbers depend on current and future interest rates, and you'd be earning some interest in the meantime). As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn $20m on paper simply by buying bonds trading below par value. Or to put it another way – if bank A holds $100m face value of 10-year bonds yielding 4%, and bank B holds $100m face value of 10-year bonds yielding 2% (but worth, say, $80m at market price), how can you claim that those banks are on equally good footing? Valuing liquid bonds at par value is pretty clearly a hack to reduce volatility and increase confidence in banks' balance sheets, even if some people in the comments seem to view it as a more logical way of accounting. (Although to be clear, I don't mind companies doing their own fuzzy math as long as they give investors enough information to do proper due diligence. It's similar to the non-GAAP earnings that a lot of tech companies report.)
- pg314 4y ago
  > If those assets are in your hold to maturity portfolio, they are still worth $100m. They are still worth $100m at maturity. $100m in ten years is (usually) worth less than $100m now. Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal terms you’ll get back your capital, but in real terms you will get back only one thousandth. To correctly value them now you need to calculate the NPV.
  - jameshart 4y ago
    You can’t calculate NPV. You can only estimate it. You can value something at its current market value, if the asset is one that has such a thing. And fair market value will generally correspond to what you would estimate to be net present value, plus whatever risk premiums and holding costs and so on that the market is accounting for.
    - pg314 4y ago
      > You can’t calculate NPV. You can only estimate it. According to Merrian-Webster [1]: calculate: 1 b: to reckon by exercise of practical judgment : ESTIMATE [1] https://www.merriam-webster.com/dictionary/calculate https://www.merriam-webster.com/dictionary/calculate
      - jameshart 4y ago
        Okay, weird bit of pedantry - pretty sure that if a math test asks you to ‘calculate the product of 127 and 954’ you wouldn’t get many marks for answering ‘about 100,000’, but feel free to staple a copy of the dictionary definition to your exam paper and see if that works for you. But sure, let me clarify it to: you can’t calculate a precise NPV. You can only estimate one. Which, when we are trying to do things like ‘calculate the total assets a bank has’, makes the net present value of their assets a not very reliable number to use.
        4y ago
echion 4y ago
> the term to search for is "net present value" I understand NPV. I'd edit my post to put "$100m equivalent [NPV] today" to makes it clearer what was meant by "equivalent", but it's too late, and that's precisely what I nodded to with "equivalent" -- no need for jargon to get the sense across. > These considerations are precisely what marking to market captures. Of course. And they are -- in theory -- exactly what GP seemed to be asking about. Valuing an instrument at its NPV (NOT MTM) is perfectly reasonable...as a starting point. GP was questioning that. As everyone has pointed out, and anyone who's bootstrapped a yield curve or traded bonds (I have) knows, there are a ton of nuance and caveats to this, but the GP was not dealing with those and they are not relevant to GP's primary point/question.

by kmod 4y ago

s1artibartfast 4y ago

If those assets are in your hold to maturity portfolio, they are still worth $100m. This return is guaranteed unless the Federal Bank defaults on those treasuries.

kmod 4y ago
$100m future dollars, which are less valuable than present dollars.
- daveguy 4y ago
  That's hedging against inflation (which is definitely something they should have been doing for long term bonds). Interest rates directly affect the sale price of a bond, and it could have been hedged against, but it wasn't required. They won't do it unless it's required. Banks over 50 billion need to be regulated again (and they should lower it to 10 billion too).
- s1artibartfast 4y ago
  $100m future dollars are still still $100m dollars. It is the value of the dollar that is changing, not the number of them that you hold. The day you are paid, you will still get handed exactly $100m million. Every day between now and then you will still have exactly $100m in bond holdings. How many cheeseburgers you can buy with that number of dollars may change from day to day, but the number of dollars will not.
  - morelisp 4y ago
    You don't need to appeal to cheeseburgers to not want to value 100 future dollars at 100 current dollars, if you can buy 100 future dollars for 80 current dollars, which is essentially what happened when rates rose. (Someone else is offering 100 future for 80 current because they have a forecast about cheeseburgers, sure. But you don't have to agree with that forecast to take their deal; the deal looks even better for you if you don't agree.)
    - s1artibartfast 4y ago
      The whole point of HTM as an asset class is that you dont plan to sell it. Think of how you would report a non-transferable asset with maturation on your balance sheet? How would you report savings in a CD with a steep early exit penalty? Herein lies the difference between a list of assets, and a list of asset liquidation value.
bjacokes 4y ago
You're saying that if a bank paid $100m for low-yielding bonds in 2021 which are now worth $80m, those bonds should be valued at $100m on the bank's balance sheet. What if a different bank pays $80m today for the same bonds? Should they be able to show an immediate $20m increase in their book value because those bonds are "worth $100m"?
- prewett 4y ago
  The problem is that they are worth $100m if held to maturity (you get your $100m back, ergo their value is $100m if held to maturity), but the current price is $80m, because who wants to buy a bond at 0% when you could get around 5% at the next Treasury auction.
  - mikewarot 4y ago
    Not only that, but the value could drop even more if an inflationary spiral happens... Bank prime loan rates have been higher than 20% in the past, which means a $100m bond 5 years out could go as low as $33m in value... a 67% haircut! Clearly, US Treasuries carry risk that's not been accounted for.
    - landemva 4y ago
      > US Treasuries carry risk that's not been accounted for. US treasury debt is approximately the safest. The risk was that SVB might need cash before the bonds matured. The regulations encouraged SBV to do this. Now the Fed put is re-imagined, and we shuffle on while mumbling 'nobody could have imagined'.
  - bjacokes 4y ago
    They're worth $80m today, and then maybe $82m next year, $84m the year after, and so on until they're worth $100m at maturity. (Obviously these numbers depend on current and future interest rates, and you'd be earning some interest in the meantime). As I was trying to point out to the parent commenter, conflating "$100m today" with "$100m at maturity" leads to clear contradictions, like saying that a bank could earn $20m on paper simply by buying bonds trading below par value. Or to put it another way – if bank A holds $100m face value of 10-year bonds yielding 4%, and bank B holds $100m face value of 10-year bonds yielding 2% (but worth, say, $80m at market price), how can you claim that those banks are on equally good footing? Valuing liquid bonds at par value is pretty clearly a hack to reduce volatility and increase confidence in banks' balance sheets, even if some people in the comments seem to view it as a more logical way of accounting. (Although to be clear, I don't mind companies doing their own fuzzy math as long as they give investors enough information to do proper due diligence. It's similar to the non-GAAP earnings that a lot of tech companies report.)
pg314 4y ago
> If those assets are in your hold to maturity portfolio, they are still worth $100m. They are still worth $100m at maturity. $100m in ten years is (usually) worth less than $100m now. Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal terms you’ll get back your capital, but in real terms you will get back only one thousandth. To correctly value them now you need to calculate the NPV.
- jameshart 4y ago
  You can’t calculate NPV. You can only estimate it. You can value something at its current market value, if the asset is one that has such a thing. And fair market value will generally correspond to what you would estimate to be net present value, plus whatever risk premiums and holding costs and so on that the market is accounting for.
  - pg314 4y ago
    > You can’t calculate NPV. You can only estimate it. According to Merrian-Webster [1]: calculate: 1 b: to reckon by exercise of practical judgment : ESTIMATE [1] https://www.merriam-webster.com/dictionary/calculate https://www.merriam-webster.com/dictionary/calculate
    - jameshart 4y ago
      Okay, weird bit of pedantry - pretty sure that if a math test asks you to ‘calculate the product of 127 and 954’ you wouldn’t get many marks for answering ‘about 100,000’, but feel free to staple a copy of the dictionary definition to your exam paper and see if that works for you. But sure, let me clarify it to: you can’t calculate a precise NPV. You can only estimate one. Which, when we are trying to do things like ‘calculate the total assets a bank has’, makes the net present value of their assets a not very reliable number to use.
      - 4y ago

echion 4y ago

> the term to search for is "net present value" I understand NPV. I'd edit my post to put "$100m equivalent [NPV] today" to makes it clearer what was meant by "equivalent", but it's too late, and that's precisely what I nodded to with "equivalent" -- no need for jargon to get the sense across. > These considerations are precisely what marking to market captures. Of course. And they are -- in theory -- exactly what GP seemed to be asking about. Valuing an instrument at its NPV (NOT MTM) is perfectly reasonable...as a starting point. GP was questioning that. As everyone has pointed out, and anyone who's bootstrapped a yield curve or traded bonds (I have) knows, there are a ton of nuance and caveats to this, but the GP was not dealing with those and they are not relevant to GP's primary point/question.