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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Corporation
2222 Kalakaua Avenue

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Honolulu HI 96815

Phone: 808.791.9888
Fax: 808.791.9898
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Measuring the marginal cost of funds for a financial institution is a critical calculation from both a management perspective and a regulatory perspective. From a management perspective, if one’s own firm faces a funding disadvantage versus a group of banks who are “too big to fail,” that has dramatic implications for corporate strategy. From a regulatory perspective, favoring a group of financial institutions with an implicit guarantee of survival can create an anti-competitive subsidy as an unintended consequence. In this note, we introduce the U.S. Dollar Cost of Funds IndexTM from Kamakura Corporation which makes quantification of funding advantages and disadvantages a practical daily reality. In subsequent notes, we quantify the funding advantages and disadvantages of major financial institutions on a daily basis.

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Long term implied forward 1 month Treasury bill rates more than reversed last week’s increases, plunging this week at intermediate maturities. The largest decrease came in June, 2016 where the forward rate dropped 0.26%. Forward 1 month T-bill rates are now projected to rise steadily until reaching a peak at 3.45% in June, 2021, almost matching the peak of two weeks ago. This peak is 0.17% lower than last week’s peak of 3.62%. The implied forecast shows projected 10 year U.S. Treasury yields rising to 3.72% in 2024, down 0.04% from last week. We also present three potential scenarios consistent with the implied forecast that represent alternative paths for interest rates. This kind of multi-factor scenario generation is essential for comprehensive asset and liability management at banks, insurance firms, pension funds, and endowments.

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One of the most persistently used formulas in fixed income markets is the relationship

Credit Spread = (1 – Recovery Rate)(Default Probability)

This simple formula asserts that the credit spread on a credit default swap or bond is simply the product of the issuer’s or reference name’s default probability times one minus the recovery rate on the transaction. The persuasive belief that this formula, or at least a simple variation on it, is true has led to a wide array of models implying default probabilities from credit spreads. In the popular press, these models are frequently invoked in headlines like “ BP Swaps Put Odds of Default at 39% ,” a June 16, 2010 forecast during the Gulf Oil spill.

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We last reviewed Vodafone Group PLC (VOD) on April 15, 2014.  Since then, the European Commission has approved Vodafone Group PLC’s acquisition of the Spanish cable operator Ono. In order to get an updated bond market view of the firm, we turn to the U.S. dollar bonds issued by Vodafone Group PLC and compare its current default probabilities and credit spreads with those on all heavily traded corporate fixed-rate bonds on August 4, 2014. 

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American International Group Inc. (AIG) was one of the largest beneficiaries of U.S. government supportduring the credit crisis, but the U.S. government’s shareholder status ended in December, 2012. In this note, we turn to the U.S. dollar bonds issued by American International Group Inc. and compare its current default probabilities and credit spreads with those on all heavily traded corporate fixed-rate bonds on July 28, 2014. A total of 38 trades were reported on 9 fixed-rate bond issues of American International Group Inc. with trading volume of $40.4 million on July 28. American International Group Inc. was the 17th most actively traded corporate bond issuer on July 28.

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