Pub. 7 2019 Issue 1

www.uba.org 20 With collective assumptions (we’ll get to them in a minute), we can see that in order to derive $1,000,000 in net advance proceeds, 4.00% of the grossed-up $1,041,667, or $41,667 would be required as a purchase of activity stock. Once cash dividends on the activity stock are deducted from interest paid on the advance, $32,649.72 would represent the net payment amount. Dividing by the gross amount of advances, we can assume that the all-in advance rate is 2.51%, rather than the posted level of 2.70%.The yield is nine basis points below that of the brokered CD with a comparable maturity. Now for the assumptions embedded within the above calculation. First, the methodology assumes that the level of the 5.75% dividend will remain static for the life of the 15-month advance. The dividend rate can vary. Hence, we might consider projecting the average dividend on activity stock over the life of the advance. Second, we have assumed that a borrower’s cost of funds is invested in the required activity stock. So, depending on the borrower’s preference, there are effectively four differing assumptions that can be made in terms of the cost of investing funds in FHLB Des Moines activity stock: invested funds: i) Zero cost. This option may be less of a reasonable as- sumption, especially in the current rising rate environment. ii) Funds invested in FHLB Des Moines activity stock are equivalent to the borrower’s general cost of funds. iii) Assignment of a specific funding cost benchmark such as the federal funds, a specific advance rate or a borrower’s cost of deposits. Ideally, if a borrower were to choose a specific cost benchmark, the duration of the benchmark would ideally coincide with that of the activity stock. iv) Invested funds are sourced from FHLB Des Moines at the same cost as the advance. Such an assumption would suppose that a borrower uses a portion of the financing to purchase the required activity stock. With the assistance of a dividend calculator available from FHLB Des Moines, Figure 2. demonstrates that, depending upon which cost of funds assumption is used, assuming a static dividend rate of 5.75%, the discount from posted advance levels would range between 19 basis points (as is assumed in Figure 1.) to 29 basis points. Figure 2. Discount Off of Posted Advance Rates Using Various Cost of Funds Assumptions A Dividend-Adjusted Comparison of Wholesale Funding Sources Under the more conservative cost of funding assumption (where funds invested in activity stock are assumed to be sourced at the same rate as the advance), the all-in rate on the 15-month bullet advance is calculated at 2.51%, versus the posted brokered CD rate of 2.60%. Aside from the adjusted rate comparison, there are qualitative differences between the two funding sources that may be highlighted, as illustrated in Figure 3.  Raising Wholesale Funds — continued from page 19