Discount Note Auction-Floater Advance

Transcript

The Discount Note Auction-Floater Advance, also known as the DNA-Floater, can be a useful and flexible funding option that can help with your liquidity needs.

So, what exactly is the Discount Note Auction?

Discount notes are short-term debt instruments issued by the FHLBank system. Notes are issued regularly through auctions at different maturities. 

The DNA-Floater is a floating-rate advance with a rate that adjusts at the discount note index plus a fixed spread determined at initiation. You can select the term of the index to be either one or three months.

A key feature of the DNA-Floater is that at each reset date you can prepay the advance without a fee.

This advance is useful in providing the interest-rate exposure of short-term liabilities while offering the liquidity benefits of longer funding.To put this in perspective, let’s look at an example:

Say you wanted to fund at the front end of the curve to meet your interest-rate risk management needs.

To accomplish this, you use the one-year maturity DNA-Floater with a monthly reset, priced at a spread of 25 basis points.

If the one-month discount note index was .01%, your advance rate on day one would be .26%. Your rate would adjust based on the index (plus the spread) at each monthly interval thereafter. 

As you can see, the advance is valuable when spreads on short-term funding become volatile. 

When you compare this to rolling one-month Classic Advances, the DNA-Floater will have less spread risk, while still having a rate determined by the short-end of the yield curve. Depending on market conditions, you may be able to save on interest expense by utilizing the DNA-Floater instead of a Classic Advance.

We can help you figure it out.Our strategies and solutions team can help you identify the funding solutions that best fit the unique needs of your balance sheet. 

Visit fhlbboston.com or call us at 1.800.357.3452.

Federal Home Loan Bank of Boston

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