Bank Analysis School - September 2023

Internal Use Only

Option Risk – Callable Bonds

Bank is stuck with a relatively low yield investment

Interest rates rise

Bond is not called

Bank invests in a callable bond

Funds must be redeployed in a lower-yield environment

Interest rates fall

Bond is called

Internal Use Only

Option Risk – Mortgage Products

Bank is stuck with relatively low yielding assets

Interest rates rise

Homeowners do not refinance

Mortgage loans and mortgage backed securities

Funds must be redeployed in a lower-yield environment

Interest rates fall

Homeowners refinance