A Member-Option Advance is one of many advance products you can use to help balance prepayment risk and reduce interest-rate risk, while maintaining flexibility.
The Member-Option Advance offers a fixed rate and fixed final term and gives you the ability to hold or return the advance to us after the designated lockout period.
You can prepay the advance without penalty, and your decision at the end of the lockout period is driven by how market conditions may have changed during that time.
You may consider using this advance in any interest rate environment.
Say you originated a pool of 30-year fixed rate residential mortgage loans into portfolio at a yield of three and a half percent and funded it with a Member-Option Advance at a rate of one and a quarter percent with a three-year maturity and one-year lockout.
If interest rates fall after you take the advance, you have the ability to return the advance at the one-year mark and replace it with cheaper funding at a rate of half a percent. In this scenario, your funding cost would be reduced from one and a quarter percent to half a percent and your margin would improve by 75 basis points.
If rates increase after you received funding, you may be better off keeping the advance past the lockout date because you will have less repricing risk than if you had funded with a shorter maturity.
The Member-Option Advance is one of the more flexible advances we offer because you can tailor the maturity, the lockout period, and the call frequency to meet your asset profile and risk management needs.
Different market conditions can create challenges for you and call for different solutions.
Our Strategies and Solutions team can work with you to identify the funding solutions that best fit the unique needs of your balance sheet.
You can learn more about our products by visiting fhlbboston.com or calling us at 1.800.357.3452.
Federal Home Loan Bank of Boston
Strategic Partnerships. Reliable Funding.