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By Paul Webber
The Federal Home Loan Bank of Boston (the Bank) recently
introduced the Symmetrical Prepayment advance, a new fixed-rate,
fixed-term advance with monthly interest payments and a bullet
payment of principal at maturity.
Unlike the Bank's standard Classic advance, the Symmetrical
Prepayment advance provides the member with a prepayment option
at market value. For instance, if rates rise, a member with
a Classic-advance structure would typically have no prepayment
fee but would not otherwise benefit from the market rise in
rates.
With the symmetrical structure, the member receives a gain
on the unwind of an underlying swap agreement used by the
Bank to fund the advance, less the present value of two basis
points per year for the remaining term of the advance. This
feature makes the advance similar to the unwind of a swap
or repurchase agreement by the member.
The symmetrical structure also has advantages for the member
should rates fall. In that case, the member's fee is typically
less than the fee for a Classic advance with similar terms.
For illustration, the prepayment feature of a Symmetrical
Prepayment advance is similar to selling a U.S. Treasury bond
except that the payoff profile is reversed. If rates rise
and a member prepays a Symmetrical Prepayment advance, the
member benefits from the rise in rates. If the member were
selling a Treasury security in a rising rate environment,
the member would experience a loss on the sale.
The minimum size for a Symmetrical Prepayment advance is
$10 million, which was established based on the Bank's need
to get effective execution of the underlying swap used to
fund the product. We are making special offerings of the advance
available to all members with a minimum advance size of $1
million. The minimum prepayment amount is the lesser of $1
million or the full amount of the advance.
Discount Note Auction Floating-Rate
Advance The Bank has also developed a long-term
floating-rate advance product, which is indexed to Federal
Home Loan Bank System discount notes. Specifically, the rate
is tied to the rate the Bank pays on discount notes sold by
the Office of Finance in its weekly auctions, plus a specified
spread. Members have the option to use an index that resets
at 28 days or 91 days. The advance can be prepaid at reset
without fee. The advance is available with terms of one to
10 years.
We will be providing additional information about this new
advance structure in the near future. We believe members will
find this structure to be an attractively priced alternative
to LIBOR-indexed floating-rate advances.
Please call the Money Desk at 1-800-357-3452 or moneydesk@fhlbboston.com
to let them know your funding requirements.
Paul Webber is first vice president /member funding services
at the Federal Home Loan Bank of Boston.
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