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Introduction
Traditional bond metrics like yield-to-maturity, duration, convexity and option-adjusted spread facilitate the investment decision, but they don't explicitly address the performance metric financial managers care most about: "Spread". These tools forecast a bond's cash flows and market value variances in changing interest rate scenarios, but they don't calculate how a financial institution's spread will be influenced by the interaction of assets and liabilities as insterest rates change. Spread Manager is designed for this task; it empowers financial managers to evaluate bonds and analyze alternatives in terms of spread. The Product
Spread Manager is based on a simple banking axiom: financial institutions derive the majority of their profits from the spread they earn between their assets and liabilities. Consequently, a financial manager's primary mission is originating or purchasing assets that can be funded prudently and profitably. Therefore, the most logical way to evaluate potential bond investments is to examine the amount of income they generate relative to the cost incurred to fund the various plausible interest rate scenarios. Spread Manager calculates a bond's contribution to earnings in multiple interest rate scenarios and through time. It captures the "funding" element traditional bond metrics do not, quantifying the impact of inherent asset/liability mismatches peculiar to a specific bond or market sector. In short, Spread Manager evaluates bonds in depository terms, combining the elements of profitability and risk management to identify the bond or bonds that can be funded the most profitably within specified risk constraints. This methodology normalizes the comparison or "levels the playing field" for bonds with different cash flow profiles or yield curve exposures and rationalizes the selection process in a framework applicable to a financial institution. SPREAD MANAGER HIGHLIGHTS - Evaluates a bond on the basis of spread contribution, the way financial managers operate their institutions
- Normalizes the comparisons of dissimilar bonds, simplifying the selection process
- Empowers the financial manager to asses alternative funding strategies efficiently and to manage interest rate risk exposure
IMPORTANT: The projections or other information generated by Spread Manager regarding the liklihood of various outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Investors should consider Spread Manager's methodology, limitations and key assumptions prior to utilizing it in the investment process and should not relay solely on Spread Manager as the basis for investment decisions as results may vary with each use and over time. To receive more information about the Spread Manager analytical tool, please contact Shay Financial Services, Inc., member FINRA/SIPC. |
