Re: re GST-B
the difference in the basis only changes the relative yields and the absolute nominal cashflows. it does not change the nominal differential between the scenarios.
Here is the math one should consider:
I bought gst in Oct @ par; sell in July for $28.50; reinvest in another security at 7.5% to the call date.
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| Nov-13 | Dec-13 | Jan-14 | Feb-14 | Mar-14 | Apr-14 | May-14 | Jun-14 | Jul-14 | Aug-14 | Oct-18 | Nov-18 | | Own to Call |
| 11.29% | 13,661 |
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| 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 25,224 |
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| | Sell Today |
| 31.67% | 5,516 |
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| 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 28,724 | - | - | - |
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| Sell/Reinvst
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| 11.88% | 15,209 |
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| 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | - | 191 | 191 | 28,691 |
| Returns | Net Cash | Gross Cash | | YTM | 11.29% | $13,661 | $38,661 | | Exit Return | 31.67% | $5,516 | $30,516 | | Total Return | 11.88% | $15,209 | $40,209 |
Marginal improvement in returns on an IRR basis, $1,500 improvement in NCF before transaction costs and taxes (if any).
if set up the spreadhsheet correctly, you can then tweak the reinvestment rates, call dates/exit dates to understand the impact of the call, if it does not get called, and what rate/time you need to earn to be indifferent. you can also model different reinvestment scenarios at the call date to see the impacts.
in order for the swap to make sense, taking into account taxes and transaction costs, you have to believe:
1. GST will get called prior to the breakeven date
2. the current reinvestment is as safe/safer than the current investment in GST
3. you will be unable to invest at the current reinvestment rate or better that is assumed at the call date for the same or better risk profile, i.e. GST will get called and in Nov 18 one wont be able to buy something equivalent or safer and earn 7.5% (hence one's view of future rates and credit spreads is crucial).
if you change the basis to $26.25:
| IRR | NCF |
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| Nov-13 | Dec-13 | Jan-14 | Feb-14 | Mar-14 | Apr-14 | May-14 | Jun-14 | Jul-14 | Aug-14 | Oct-18 | Nov-18 | | Own to Call | 9.92% | 12,411 |
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| 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 25,224 |
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| | Sell Today | 23.08% | 4,266 |
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| 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 28,724 | - | - | - |
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| | Sell/Reinvest | 10.56% | 13,959 |
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| 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | - | 191 | 191 | 28,691 |
| YTM | 9.92% | $12,411 | $38,661 | | Exit Return | 23.08% | $4,266 | $30,516 | | Total Return | 10.56% | $13,959 | $40,209 | |
