I will admit that sometimes I look at the analysis generated by HIMIPref™ and blink. The assumptions and procedures and approximations used in the course of the analysis can sometimes work together in unexpected ways … so the results need to be reviewed in order to determine whether<\/p>\n
Such are the joys of quantitative analysis, when you can spend a month trying to figure out the analysis of one instrument on a date from ten years back!<\/p>\n
This time, however, it’s today’s analysis of RY.PR.N: it closed today at 26.00-10, 28×1, after trading 29,390 shares in a range of 26.00-10.<\/p>\n
And yet despite the $26.00 price, HIMIPref™ shows the pre-tax bid-YTW scenario as being the limitMaturity – that is, the dummy maturity thirty-years hence which is used as a substite for “forever”.<\/p>\n
First, some facts: the issue closed on December 9<\/a> and is a fixed reset with the terms 6.25%+350. The analysis assumes that 5-year Canadas will now and forever yield 1.83%, so the rate is presumed to be reset to 5.33% at the first (and all subsequent) reset dates.<\/p>\n HIMIPref™ calculates the yield to first call of 5.4130% and yield-to-limit of 5.2913%. I have uploaded the cash-flow reports for the five year<\/a> and 30-year<\/a> maturities. The YTW is the worst yield, 5.2913%, and the YTW scenario is the 30-year maturity.<\/p>\n There cannot be much argument about the yield calculation for the five year maturity; everything is known, so it’s all perfectly standard. However, the thirty year maturity is simply an analytical placeholder for “forever” and the maturity value is not known. As you can see from the reports, HIMIPref™ estimates a price of $23.44 for the 30-year case.<\/p>\n Why $23.44? For that we have to look at the HIMIPref™ calculation of costYield … I have uploaded the relevant cash flow analysis<\/a>. Readers will note the cash flow entry dated 2014-3-26, for -1.73 (future value) discounted to -1.34 (present value). This is the estimate of what the issuer’s call option is costing the holder; the implication is that if this option didn’t exist, we’d be willing to pay $1.34 (present value) more for the security.<\/p>\n The value of the option is calculated using a time-influenced distribution of possible prices centred on the current price. As shown by the Option Cash Flow Effect Analysis<\/a>, it is currently assumed that there is a 53% chance of the option being exercised. Slicing the price distribution into two parts on that date, it is calculated that the average unconstrained price in exercise scenarios is 28.24; the average unconstrained price in non-exercise scenarios is 23.44. Voila! An estimated maturity price of $23.44.<\/p>\n