Before
All of the Company’s securities with the exception of $35,000 in equities are issued by the U.S. Treasury or by a U.S. Government Agency. Therefore, little credit risk exists in the portfolio. The risk inherent in the Company’s security portfolio is interest rate risk and option risk. The U.S. Treasury Note and Agency debentures are purchased with a final maturity of no greater than four years. The Company owns a limited number of Agency callables. It is the Company’s policy not to buy callables with a final maturity of greater than five years. The Company owns a $35.0 million portfolio of Agency issued mortgage-backed securities. These are comprised of $5 million in Collateralized Mortgage Obligations with the remainder of the portfolio in mortgage-backed pass-through securities.
Before, with commentary
All of the Company’s securities with the exception of $35,000 in equities are issued by the U.S. Treasury or by a U.S. Government Agency. Therefore, little credit risk exists in the portfolio. The risk inherent in the Company’s security portfolio is interest rate risk and option risk. [Not everyone knows what these terms mean.] The U.S. Treasury Note and Agency debentures are purchased with a final maturity of no greater than four years. The Company owns a limited number of Agency callables. [Not everyone knows what these are.] It is the Company’s policy not to buy callables with a final maturity of greater than five years. The Company owns a $35.0 million portfolio of Agency issued mortgage-backed securities. These are comprised of [please don’t say “comprised of”! See this tip.] $5 million in Collateralized Mortgage Obligations [this disclosure was drafted before 2008, but even now I don’t think it’s safe to assume that everyone know what these are] with the remainder of the portfolio in mortgage-backed pass-through securities [or these].
After
There is little credit risk in the Company’s securities portfolio. Except for $35,000 in common stock of a publicly traded company, all of the securities are issued by the U.S. Treasury or by a U.S. government agency. However, the Company’s portfolio poses other types of risk.
First, the Company owns U.S. Treasury Notes and debentures issued by various government agencies. These instruments bear a fixed rate of interest, which presents “interest rate risk.” If the Company holds fixed rate debt while interest rates are rising, the Company will be earning less than a market rate on its investment. To mitigate this risk, the Company has a policy of not acquiring fixed-rate instruments with a maturity of more than five years.
Second, the Company owns a limited number of “Agency callables,” which are securities issued by government agencies that the issuers can choose to redeem before maturity. These instruments pose both “interest rate risk” and “option risk.” Again, interest rate risk is triggered by rising interest rates. If rates increase after the Company purchases a fixed rate callable, the Company will have an investment that earns less than market rates. Declining interest rates trigger option risk. If market rates fall, issuers of callable fixed rate instruments may redeem them before maturity, which will give the Company a return on its investment that is less than we currently expect. The Company mitigates these risks by buying only callables with maturities of five years or less.
Third, the Company owns a $35.0 million portfolio of mortgage-backed securities issued by government agencies. This portfolio comprises $5 million in collateralized mortgage obligations and $30 million in mortgage-backed pass-through securities.
• A “mortgage-backed security” represents ownership of a pool of mortgage loans. As the mortgages are paid off, a portion of the principal and interest payments are “passed through” to the owners of the securities.
• A “collateralized mortgage obligation” is a debt security that is secured by a portfolio of mortgages, mortgage-backed securities, U.S. government securities, or corporate debt obligations.
