Interest Rate Risk Basics - Financial Risk Management · PDF fileWhat Is Interest Rate Risk?...

© 2015 FARIN & Associates Inc.

Interest Rate Risk BasicsMeasuring & Managing

Earnings & Value at Risk

Urum Urumoglu

Senior Consultant

FARIN & Associates, Inc..

[email protected]

1


Session Overview

Session 1

• Define IRR within ALM

• IRR Management

Program

• IRR Measurement Tools

– Gap Analysis

– Income Simulation

– Market Value Analysis

(EVE/NEV)

• Define Earnings at Risk

– Key Measurements

– Major Assumptions

– Interpreting Results

• Define Market Value

– Key Measurement Points

– Major Assumptions

– Interpreting Results

• Common Faults in Market

Value Reporting

• Combining Income and

Value at Risk Analysis

2

Session 2


What Is Asset/Liability Management?

Definition:

“asset/liability management” is the processes of

acquiring and deploying funds to maximize the

earnings, and value of the institution, while

controlling financial risks.

• How do we make money?

• Measure all Financial Risks

3


What Is Asset/Liability Management?

• Financial risks are measured to determine if plan can be

met in reasonable risk situations

– When changes in credit quality occur

– When market interest rates move

– When liquidity needs or availability change

– When regulators modify expectations

• ALCO recognizes we manage risk to make money! We

are NOT risk minimizers.

4


Understanding Financial Risks

• What Financial Risks Impact Core Earnings?

– Credit Risk: Will the borrower of funds repay the committed

amount?

– Liquidity Risk: Will we have enough funds to meet the demands

for loans or deposit withdrawals

– Interest Rate Risk: To what extent will the core earnings change if

market interest rates change?

• Factors in Measuring Risks

– Must be able to project cash flows (Principal & Interest)

– Must understand what may cause changes in flows

• Embedded Options

• Pricing/Customer Behavior

5


ALCO’s Primary Responsibilities

6

• Manage the level of Net Interest Income/Net Income

• Management of Balance Sheet Structure

– Loan/Investment & Deposit/Borrowing Mix

– Growth rates

– Controlled through Loan & Deposit Pricing

– Investment Portfolio Management

• Earnings impact

• Liquidity Needs

– Wholesale Funding

– Capital Utilization

• Risk Measurement and Management

• Interest Rate Risk

• Liquidity Risk

• Credit Risk

• Regulatory Risk


ALCO Controls for IRR

7

• Loan and Deposit Pricing

– Most powerful ALM tool you have!

• Mix Optimization

• Growth Rate

• Wholesale Alternatives

– Borrowings/Investments

– Synthetics/Derivatives

• Leverage of capital

– Higher Leverage means lower capital/assets but

creates higher shareholder return


Financial Institutions Risk Management

Financial & Business Risk Management

Financial Risks

Liquidity Risk

Maturity Mismatch

Asset/Liability Imbalance

Cash Flow

Credit Risk

Default

Downgrade

Counterparty

Interest Rate Risk

Commodity Prices

Equity Prices

Interest Rate Changes

Business Risks

Management Risks

Strategic Risk

Operational Risks

People Risks

Legal Risks

System Risks

External Risks

8


THE ALCO PROCESS

Capital Planning

Credit Risks

Liquidity Risk

Interest Rate Risk

Operational Risk

Reputation Risk

Regulatory Risk

Market Risk

9


Balanced Financial Goals

10

Growth

Scenario

Beginning

Assets Total Capital

Long Term

Capital

Ratio

Annual

Asset

Growth

Assets After

Growth

New Total

Capital to

Maintain

Ratio

Additional

Capital

Needed

Average

Assets ROA

1 100,000$ 8,500$ 9.50% 0.00% 100,000$ 9,500$ 1,000$ 100,000$ 1.00%

2 100,000$ 8,500$ 9.50% 5.00% 105,000$ 9,975$ 1,475$ 102,500$ 1.44%

3 100,000$ 8,500$ 9.50% 10.00% 110,000$ 10,450$ 1,950$ 105,000$ 1.86%

4 100,000$ 8,500$ 9.50% 15.00% 115,000$ 10,925$ 2,425$ 107,500$ 2.26%

5 100,000$ 8,500$ 9.50% 20.00% 120,000$ 11,400$ 2,900$ 110,000$ 2.64%

6 100,000$ 8,500$ 9.50% 25.00% 125,000$ 11,875$ 3,375$ 112,500$ 3.00%

Growth

Scenario

Beginning

Assets Total Capital

Capital

Ratio

Annual

Asset

Growth

Assets After

Growth

New Total

Capital to

Maintain

Ratio

Additional

Capital

Needed

Average

Assets ROA

1 100,000$ 8,500$ 8.50% 0.00% 100,000$ 8,500$ -$ 100,000$ 0.00%

2 100,000$ 8,500$ 8.50% 5.00% 105,000$ 8,925$ 425$ 102,500$ 0.41%

3 100,000$ 8,500$ 8.50% 10.00% 110,000$ 9,350$ 850$ 105,000$ 0.81%

4 100,000$ 8,500$ 8.50% 15.00% 115,000$ 9,775$ 1,275$ 107,500$ 1.19%

5 100,000$ 8,500$ 8.50% 20.00% 120,000$ 10,200$ 1,700$ 110,000$ 1.55%

6 100,000$ 8,500$ 8.50% 25.00% 125,000$ 10,625$ 2,125$ 112,500$ 1.89%


MEASURING EARNINGS @ RISK

IRR

11


What Is Interest Rate Risk?

• Interest Rate Risk is the risk that an institution’s

earnings AND market value will change as

market interest rate change.

– Measures the amount of change in earnings or value

under different rates.

– The earnings at risk portion measures short-term

changes to the income statement.

– The market value at risk element measures long-term

risks to earnings and relative value of assets &

liabilities.

– Both measures indicate the impact on earnings

capacity – only difference is the horizon evaluated.

12


Understanding Interest Rate Risk

13

• Net interest margin depends on how rates impact

– Changes in interest incomeVs.

– Change in interest expense

• What drives the levels of interest income or expense?

– Mix of rate sensitive assets (loans vs. Investments)

– Mix of rate sensitive liabilities (deposits, non-interest deposits &

borrowings)

– How fast the rates can reset on each

• Fixed rate vs. Variable

• Your pricing behavior

• What horizon do we measure

– 1-2 years


Common Types of Interest Rate Risk

• Mismatch/Repricing Risk: The risk that assets and liabilities reprice or mature at

different times, causing margins between interest income and interest expense to

narrow.

• Basis Risk: The risk that changes in underlying index rates used to price assets and

liabilities do not change in a correlated manner, causing margins to narrow.

• Prepayment/Extension Risks: The risk that asset repayments accelerate at a

time when interest rates are low, resulting in diminished interest income and the need

to reinvest repaid funds in lower-yielding assets. This risk intensifies when loan

customers or bond issuers exercise their explicit call options to pay off the bank’s asset

prior to maturity and interest rates decline. The flip side of prepayment risk is

extension risk, which stems from the lengthening of asset payoff rates in a rising rate

environment, thereby reducing the funds available to invest at higher yields.

• Yield Curve Risk: The risk that nonparallel changes in the yield curve will

disproportionately affect asset values or cash flows.

• Reinvestment Risk: The risk that as one instrument matures and is replaced with

another, the funds being reinvested will carry a different interest rate than the funds in

the original instrument.

14


Interest Rate Risk

Financial Instrument Sources

• Four Reasons Why or When Financial Instruments

Are Rate Sensitive

– Maturity

• Example: 90 day CD with P&I due at maturity

– Amortization

• Example: 30 year fixed rate mortgage reprices gradually as the

principal and interest payments are received.

– Prepayment

• Example: 11% fixed rate mortgage with market rates of 8%. It

reprices when owner refinances to obtain a better rate.

– Contractual repricing terms on arm or variable rate loan

• Example: 30 year ARM with annual resets.

15

Interest Rate Risk is Caused by Changes in Actual vs. Expected Cash Flow


Four key elements of a risk

Management program for IRR

16


Board & Management Oversight

• Ultimate responsibility & delegation (ALCO)

• Understanding types of risks

• Risk tolerance / appetite

• Providing appropriate guidance – policies

• Management governance

• Overseeing appropriate risk controls & limits

• Monitoring risk exposure limits

17


Policies & Risk Limits

• Institution’s objectives for ALM

• Standalone documents or housed in boarder

ALM policy

• Describe risk tolerance / appetite

• Methods to identify, quantify and report

exposures

• Responsible parties, clear lines of authority

• Permissible activities that an institution may

conduct

• Control & risk limits

18


Risk Measurement & Reporting

• Senior management responsibilities

• Types of tools or models

• Complexity and size of the institution

• Reporting frequency, how often

• Compliance with established risk limits

• Potential noncompliance

• Action plans

19


Internal Controls & Audit

• Regulatory Expectations

• Review of data accuracy

• Reporting compliance w-policy limits

• Reasonableness of assumptions

• Outputs are reasonable and accurate

• Independent reviews

• Minimum annual compliance check

20


Common IRR Measurement

Techniques

21


IRR Measurement Techniques

22

Picking the Right Tool to match the job…

• Gap Analysis– Measures dollar volume difference between rate

sensitive (repricing) assets and liabilities

• NOT ACCEPTABLE AS A PRIMARY TOOL

• Income Simulation– Measures impact of interest rate changes on earnings

• Economic Value of Equity (EVE)– Present value of all asset, liability, and financial

derivative cash flows


Gap Analysis

• Inventories Timing of Repricing of RSA & RSL

– Future divided into time bands (buckets)

– Balances slotted based on

• Cash flows (fixed)

• Scheduled repricing (variable)

– Total RSA & RSL totaled by time band

– Control ratios are

• Gap/Assets (+/-10%)

• RSA/RSL (0.8 - 1.2)

• Goal of GAP: Provide a Proxy on Earnings at Risk

• Advantages

– Easy data availability

– Can be done manually

– Inexpensive

• Disadvantages

– How soon but not how much

– Fails to consider option risk

– Not a good market value tool

– Difficult to explain to boards &

non-financial managers

– Measures risk but not return

23


ALCO Decisions

• Describing the Basic Balance Sheet Positions…

– Asset Sensitive: More assets reprice than liabilities

• If rates increase Income should increase

• If rates decrease Income should decline

– Liability Sensitive: More liabilities reprice than assets

• If rates decrease Income should increase

• If rates increase Income should drop

– Is it possible to have a neutral position?

• Option risks make this nearly impossible for retail financial

institutions

24


Examining IRR Measures

• Let’s look at a sample institution

– $900 MM Commercial bank

• 85% Loan/Assets

• 10% NIB Funding

• 17% Checking & Savings

• 56% CDs

• 9% Capital

– Gap Analysis used as primary IRR tool

• As of date = June 2006

25


Case Study – Gap

26

Month 1 Month 2 Month 3 2nd Quarter 3rd Quarter 4th Quarter

Total RSA 371,634,902 22,487,784 14,125,103 41,131,542 33,236,705 41,011,583

Total RSL 52,728,663 96,652,568 7,002,470 151,943,964 135,255,369 108,188,666

Gap (RSA-RSL) 318,906,240 (74,164,784) 7,122,634 (110,812,421) (102,018,664) (67,177,083)

Cum RSA 371,634,902 394,122,686 408,247,789 449,379,332 482,616,037 523,627,620

Cum RSL 52,728,663 149,381,230 156,383,700 308,327,663 443,583,032 551,771,699

Cum Gap (RSA-RSL) 318,906,240 244,741,456 251,864,090 141,051,669 39,033,005 (28,144,078)

RSA/RSL 7.05 0.23 2.02 0.27 0.25 0.38

Cum RSA/RSL 7.05 2.64 2.61 1.46 1.09 0.95

Gap/Assets 37.76% -8.78% 0.84% -13.12% -12.08% -7.95%

Cum Gap/Assets 37.76% 28.98% 29.82% 16.70% 4.62% -3.33%

Positive Gap at 1 month indicates VR loans and extra Cash investments

Negative cumulative gap at 1 yr. says little chg. in earnings projected


Actual Rate MovementsTreasury Rate Comparisons

4.00

4.20

4.40

4.60

4.80

5.00

5.20

5.40

1 M

onth B

ill -

BEY

3 M

onth B

ill -

BEY

6 M

onth B

ill -

BEY

1 Yea

r T-B

ill R

ate

18 M

onth T

-Bill

Rat

e

2 Yea

r Note

Yie

ld

3 Yea

r Note

Yie

ld

5 Yea

r Note

Yie

ld

10 Y

ear Note

Yie

ld

30 Y

ear Ext

rapola

ted B

ond Yie

ld

2006M06 2006M12 2007M06

27


Actual Change in NIM

28

Actual NIM drops from June 06 by nearly 10%


Components of NIM ChangeChanges in Net Int Margin Components

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

Mar 2006-YTD Jun 2006-YTD Sep 2006-YTD Dec 2006-YTD

Ch

g in

NIM

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

Ch

g in

Ma

rke

t R

ate

s

Chg in Int Inc/AA Chg in Int Exp/AA Chg in NIM/AA Chng in 6 Mo Treas Chg in 1 Yr Treas Chg in 10 Yr Treas

29

Change in Interest Expense Killed Margin!


Issues

• Prior graph shows:

– Lines Graph – Changes in Qtrly. interest rates

– Int. Inc.. and Int. Exp. both rise in 2nd Qtr.

– Int. Exp. rises faster than Int. Inc..

– Result - NIM Declines 10%

• Institution raised deposit costs when rates

had actually decreased - PRICING

• It’s not enough to measure WHEN something

reprices but HOW MUCH it will reprice

• Modeling risk requires realistic assumptions

on institution pricing actions

30


MODELING INCOME @ RISK

Income Simulation

31


Income Simulation Choices

32

• Static Simulation

– Hold balance sheet constant. No change in mix or size

– Reinvest cash flows back into same account and assumed market rates

– Only change is earnings/net income

– No assessment of strategy

• Modified Static Simulation

– Hold balance sheet size constant, but reinvest flows from products not

offered, not favored to real offerings/real rates

– No assessment of strategy

• Dynamic Simulation

– Measure risk in planned changes in balance sheet size/mix

– Advanced simulation changes growth/mix by rate

– Provides assessment of strategy for comparison to “What-If”


Income Simulation

33

Static

• Projection of balance sheet

assumes no change in level or mix.

– Reinvest from one line back into

same line at new rates

• Apply interest rate changes

(shocks, ramps or forecasts) to test

impact of rate changes on income.

• Income at risk = Projected changes

in income level from base rate

forecast to a different forecast.

Dynamic

• Projection of institution’s financial

statements based on a set of

assumptions.

– Total Assets may change

– Loan/Investment &

deposits/borrowings levels change

– Consistent with Budgeting and

Liquidity management

• Measure effect of rate changes on

income by measuring multiple rate

forecasts.

• Income at risk is measured by

fluctuations in income

measurement under the different

rate environments


Dynamic Income Simulation

• Advantages– Model used for dynamic

income at risk analysis can be

used for multiple purposes.

• Budgeting

• Strategic Planning

• Interest Rate Risk Analysis

• Liquidity Risk

– Measures most important

management issue:

• short and medium term

earnings –

• the effect of rate changes

performance

• ROA, ROE, EPS, etc.

• Disadvantages– Cost of software

– People costs for skills to

manage

– Data and Time Intensive

• Ideally your plan should be

incorporated into model.

• As we see more regulatory

action on Enterprise Risk

Management, expect more

acceptance and expectation for

integrated plans and risk

management…

34


Static vs. Dynamic IAR

35

How does your view of income sensitivity change?



36



37



38


Advanced Issues in Dynamic IAR

39

• When running dynamic IAR institution’s must

consider

– How rate changes impact

• Growth rates by rate environment

• Impact on resulting balance sheet mix

• How offering rates change on key products

• Often assumptions held constant

– Will loans continue to grow in +300 bp rates?

– Are deposit rates going to move the same amount for

all rate changes?


IRR Question

40

• Why if we are running a dynamic projection

of our plan/balance sheet do we have to run

a static analysis too?

– Guidance says so…

– Build confidence/trust in modeling process

– Help show how future balance sheet impacts risk


Major Assumptions in Income Simulation

41

Static IAR

• Betas on loans & deposits

– How will offer rates change

with market moves?

• Loan/investment prepayment

expectations

– Anticipated early pay

down/payoff of loan

balances

– How do these “speeds”

change when rates move?

– See option risk!

Dynamic IAR

• Asset growth/mix

– One set of assumptions for

all rate changes (most

common)

– Separate assumptions

based in interest

rate/economic projections

(emerging)

• Funding mix

– Growth assumptions on

deposit categories

– Growth/plug assumptions for

borrowings


FFIEC IRR ADVISORY

The time has come to do more in ALCO

42


Joint Agency Policy on IRR

• First Adopted in 1996 – Added the S component to CAMEL Rating

– Developed Qualitative Assessment process for Examination

• No Uniform Supervisory Measure

• Major Components– Board & Senior Management Oversight Roles

– Risk Management Processes• Controls & Limits

• Identification & Measurement

• Monitoring & Reporting

• Internal Audit & Review

43


Joint Agency Policy Statement5 Areas of Risk To Model

1. Repricing Risk: Impact of mismatch of repricing timing or amount on earnings/capital

2. Basis Risk: How different balance sheet components respond to market rate movements due to driver response– Example: Libor vs. Prime movements

3. Yield Curve Risk: Recognition that Yield Curves do not move the same amounts for all maturities (non-parallel movements)

4. Price Risk: Changes in market values of financial instruments and the impact on the market value of capital.

5. Option Risk: Changes to cash flows resulting from rate movements

44


2010 FFIEC IRR Guidance

• 2010-1A IRR Regulatory Guidance

– Issued December 2009

• Restatement of 1996 Joint Agency Policy Statement on Interest Rate Risk– FIL-52-96 Joint Agency Policy Statement: Interest Rate Risk

– http://www.fdic.gov/news/news/financial/1996/fil9652.html

• 3 Major Issues:

– Effective Policies & Governance

– Effective Measurements

– Meaningful & Adequate Reporting

45


2010 FFIEC IRR Guidance

• What to Measure– To obtain “Well Managed” rating, must measure both

earnings & economic value at risk

– Must extend simulation of Income at Risk to minimum

of 2 years.

– If you are using dynamic balance sheet modeling, you

must also run a static balance sheet.

• Why? Minimize Assumption Risk

• Must be able to prove your model is effective at measuring

real risks

46


KEYS TO BUILDING A VALID

MODEL

Managing Internal Assumptions

47


Assumptions in Modeling

• Internal Assumptions: Those inputs that ALCO

can control

– Offering rates

– Growth & mix projections

– Deposit assumptions; beta and decay rates

• External Assumptions: Assumptions that

influence results that are outside of ALCO control

– Future interest rate levels

– General economy

– Loan prepayment speeds

48


ALCO Model Keys

• Models depend on accurate assumptions

• Most critical of all assumptions is the speed of cash flows

coming due and repricing - CONTROLLABLE

– More asset flows, faster the response to rate movements

• Recent years have seen regulatory pressure to Validate

models

– Model Validation is designed to ensure proper flows, management

assumptions, and market assumptions

• Ideally, ALCO and Budget processes would share

assumptions and monthly variances validate projected

flows vs. actual

– Can be used to directly impact earnings and production

expectations

49


Common Issues in ALCO Models

• Bad input data skews projected cash

flow/repricing information

– Begin monitoring cash flows behind Income at Risk

results

– Explain and document all discussions of variance and

production (minutes)

• Deposit repricing rates versus expected or past

performance don’t match

• Little time spent assessing “What-if” or real world

plans

50


Deposit Assumptions in IRR Model

• Major source of margin concern centers on

deposit rate movements in rising rates.

• Following analysis tracked actual rates to

historical through last rising rates

• Comparison of margin performance to projection

51


Historical Rate Comparison

52

Current concern is that rates will move as they did in ‘04-’07


Model Assumptions: Deposit Rates

Account Flat Rates Pricing Rule Rising 3%

Rates over 12

months

Shock +2%

Immediate

Savings 0.05% Move by 50% of rate

change

1.55% at end

of 1 yr

1.05% in 1

month

NOW 0.05% Move by 50% of rate

change

1.55% at end

of 1 yr

1.05% in 1

month

MMDA 0.25% Move by 75% of rate

change

2.5% at end of

1 yr

1.75% in 1

month

Rewards 1.13% Move by 50% of rate

change

2.98% at end

of 1 yr

2.48% in 1

month

53


Sample Bank NMD Rates

54

MMDA rates reached a “cap” in last rate rise

Checking rates mirrored MMDA and new

Rewards Account introduced as cost control

Measure

Savings rates are on life support…


Rate Comparison Actual to Forecast

Actual Real Changes

‘04-’07

Actual %

change

Savings 0.00% 0%

NOW 2.5% 58%

MMDA 2.0% 48%

Rewards ??? ???

Projected Projected %

Change

Savings 50%

NOW 50%

MMDA 75%

Rewards 50%

55

Need to rethink deposit rate changes in model then

rerun income @ risk to determine true sensitivity

Areas of pricing concern:

Savings – significantly different real response than projected

MMDA – Moderately overstated

NOW – reasonable but how does the addition of Rewards

account change response this time?

© 2015 FARIN & Associates Inc. 56

56

Impact of Pricing Betas

Questions:

1. Which of these cost of funds profiles would you prefer to have with rising rates?

2. What would that information allow you to do with asset and funding allocation?


EXTERNAL RATE FORECASTS

What Rate Projections Do I Use?

57


What Rate Projections Should I Use?

• Most ALCO’s focus on

rate shocks

– Little Probability

– Misstate earnings levels

• Some use rate ramps

– No bearing to real rate

movements

– When rates change impacts

performance

• Often one “index” used to

control all offering rates

– “simplify” the model

– Ignores Basis Risk

• Budgets built on single

rate forecast

– off track when Fed moves

– Assuming 100% probability

58


FFIEC IRR Guidance

• What Interest Rates To Measure?– Traditional measures have been shocks

• +/- 100, 200, & 300 basis points

• Not enough stress, implied a 400 bp test

– Rate movements must be both severe and

plausible

• Must recognize current cycle and possibility for scenario

• Should consider changes in slope, & twists in curve

• Who defines plausible?

• Are parallel shocks plausible?

59


Historical Rate Comparison

60

What do you think the concern is over rising rates?

• In the past decade has there ever been an immediate and parallel

rate shock?

• This graphs explains both yield curve and basis risk management!


Global Insight – December 2012 Forecast

61

Probability

Base: 60%

High: 20%

Low: 20%


Rate Forecasts – Best Practices

• Policy must address actions when outside limits

in relative rate probability

– If rate forecast probability < 10%, no actions required

– If rate forecast probability > 10% but < 20%, ALCO

prepares list of possible strategies, timeline & impact

– If rate forecast probability > 20%, immediate actions

taken to return to compliance

62


New OCC Data Collection - IRR

• Beginning in Late 2013 OCC began collecting

IRR information from regulated institutions

– Interest Rate Risk Information on

• Short Term Earnings at Risk (1 & 2 Year Measures)

• Value at Risk (Long Term Exposure)

• Investment Portfolio Risks

– Key Non-maturity Deposit Assumptions

• Decay Rate

• Model repricing Rates (+/- 1% Rates)

• Market Value Result (+/- 1% and Flat Rates)

• Interesting Rate Movements Requested on

Earnings at Risk

63


OCC Interest Rate Risk Form

• Requesting Traditional +/-4%

movements

– Allowing them to be either shocks or

ramps in the input selections

• Added in 5 new movements

– Bull Flattening

– Bear Flattening

– Inversion

– Steepening

– Twist

• These are not “required” but how

does it look if you don’t have them

and your peers do?

64


New Rate Movements - OCC

• Interest Rate Movement Definitions

– Bull Flattening

• A yield-rate environment in which long-term rates are decreasing at a

rate faster than short-term rates. This causes the yield curve to flatten

as the short-term and long-term rates start to converge

– Bear Flattening

• A yield-rate environment in which short-term interest rates are

increasing at a faster rate than long-term interest rates. This causes

the yield curve to flatten as short-term and long-term rates start to

converge.

– Inversion

• An interest rate environment in which long-term debt instruments

have a lower yield than short-term debt instruments of the same

credit quality. This type of yield curve is the rarest of the three main

curve types and is considered to be a predictor of economic

recession.

65


New Rate Movements - OCC

• Interest Rate Movement Definitions

– Steepening (Bear or Bull)

• A widening of the yield curve caused by long-term rates increasing at

a faster rate than short-term rates or short-term rates declining faster

than long-term. This causes a larger spread between the two rates as

the long-term rate moves further away from the short-term rate.

– Twist

• A yield curve change predicated on government intervention through

monetary policy to manipulate long-term interest rates lower. Used in

recent QE approach to manage long-term costs when short-term

rates were already at or near 0%.

66


For Additional Information

• Visit our Encyclopedia for more definition of new

terminology and past articles related to IRR

www.farin.com

• If you have any questions, please email me with

the session name in the subject line.

• Thank you for attending. I hope to see you on

next session.

67


How We Can Help

68

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Interest Rate Risk Basics - Financial Risk Management · PDF fileWhat Is Interest Rate Risk?...

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