✏️ Bonds and SVB (Silicon Valley Bank)

❔ Hey Rob, Slightly tongue-in-cheek. I’m a little sad we don’t have a section today. I’ve been fascinated by the SVB Bank run and was looking forward to an exciting conversationand your thoughts on if the bank should have done anything differently to manage its risk given its unique niche of funds.
Can we spend some time on it the next time we get together?

See answer

✔ That’s a perfect question because it combines three things that we’ve covered heavily:

1. Bond pricing and interest rate risk.
2. Federal reserve policy.
3. Bank runs.  ✅

✏️ Suppose you have 10 year US treasuries with a face value of $\$20B$. Interest rates have been so low that we will assume that the coupon rate is $0$. Suppose that similar bonds are earning $.5\%$ interest. How much are your bonds worth?

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$PB = \frac{\$20}{(1+.5\%)^{10}} = \$19.03B$

✏️ Next, suppose that the fed raises interest rates to fight inflation. Suppose the yield on the 10 year treasury rises to $3.5\%$. How much are your bonds worth? Did you make money or lose it? How much? Explain.

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$PB = \frac{\$20}{(1+3.5\%)^{10}} = \$14.18$
Your portfolio of bonds has dropped in value from $\$19.03B$ to $\$14.18B$. You have lost $\$19.03B - \$14.18 = \$4850 \;Million$.

Any of these topics would be great for grad papers.