Laddered Muni Interest Rate Scenario Tool

The information presented in the scenario tool is for hypothetical and illustrative purposes only. Results may not represent the experience of individual investors, and should not be construed as tax or legal advice. An investor should consult a financial and /or tax professional concerning his or her specific situation before making any financial decisions. The use of tools cannot guarantee performance. Any references to future returns should not be construed as an estimate of the results a client portfolio may achieve.

Yields, cumulative income and total return shown do not reflect the effect fees imposed by an investment manager nor does it reflect the impact of taxes. Fees and taxes will reduce the value of a client’s portfolio. Past performance is no guarantee of future results.

The simulations presented do not represent the results that any particular investor actually attained. The information presented is based, in part, on hypothetical assumptions entered by the user. No representation or warranty is made as to the reasonableness of the assumptions made or that all the assumptions used in achieving the returns have been stated or fully considered. Simulated results have many inherent limitations and no representation is made that any account will or is likely to profit similar to those shown in the scenarios. Actual performance results may differ, and may differ substantially, from the simulations. Changes in the assumptions may have a material impact on the hypothetical results presented.

RISKS: Municipal securities are subject to the risk that legislative changes and local and business developments may adversely affect the yield or value of the strategy’s investments in such securities. Municipal securities are subject to credit risk, which is the risk that the issuer could default on interest or principal payments. Municipal securities are subject to interest rate risk. Rising interest rates could reduce the value of the bonds in the portfolio, thus adversely affecting the value of the overall investment.

Scenario Assumptions: All returns and yields are gross of fees and taxes. The hypothetical laddered portfolio is defined by user inputs (i.e. the maturity start and end year in the tool above) where an equal investment is allocated to each maturity from “x” to “y” years. The length of the ladder “x” to “y” is determined by the “Ladder Range” input. As the first year bond matures or rolls down outside the specified ladder range and needs to be sold, additional bonds are purchased on the furthest rung of the ladder using those proceeds. It is assumed that bonds are purchased at par where the coupon equals the yield. Yield curves are calculated using a basket of bonds generated by a rules based search of the municipal bond universe found on Bloomberg. The criteria used in selecting these bonds are as follows: All bonds are Tax-Exempt General Obligation or Revenue Bonds. The maturity size for each bond is $2 million or greater. The dated date for each bond is greater than 01/01/2019. The range of maturities in the basket are from 1 to 20 years. Bonds with maturities greater than 10 years have a 9 or 10 year call. Bonds with maturities 10 years and less have a coupon between 4% and 5%, whereas bonds maturing greater than 10 years have a minimum coupon of 5%. Each bond has at least one rating from either Moody’s, S&P and Fitch, with the lowest rating being “AA-“ or “A-“ dependent upon the curve. The “Ladder Quality” input determines which yield curve is used. These are approximate yields and may not represent an investor’s actual portfolio yield. A “AA” and “A” rated Ladder may contain bonds that have higher ratings (i.e. the minimum credit rating selected in the tool above) than the minimum rating of that specified Ladder. Changes in purchase yields over the life of the laddered portfolio are determined by modifying the original purchase yields by the “Interest Rate Shock” inputs. For example: If the user chooses a 2% rise in rates over 5 years, the model will assume rates rise .40% per year each year for 5 years for all rungs of the ladder. The model then assumes rates stay flat in the years following. Maturing and sold proceeds are reinvested at the new adjusted yield in the longest rung of the Ladder. Each rung has a specific duration. The “Starting Average Duration” (i.e. the starting average duration in the tool above) is the average duration of the portfolio. The bonds in rungs from 1 to 10 years consist of non-callable bonds. Bonds in rungs beyond 10 years consist of callable bonds with a 10 year par call. The duration for each rung is derived using a modified duration calculation. The “Starting Average Maturity” is the average maturity of the portfolio. The “Starting Yield to Worst” is the average yield of the portfolio. The change in yield is determined as follows: After one year, what was originally an “x” year bond will be an “x”-1 year bond with a yield equal to the original “x”-1 year yield, plus or minus any yield change applied from the model’s Interest Rate Shock inputs. The annual total return of the laddered portfolio is calculated by adding the average annual coupon income from each bond and the weighted average of the change in price of each bond. The change in price of each bond is calculated by subtracting the beginning price from the ending price divided by the beginning price. The bond prices are derived using the price function assuming redemption at par, semiannual coupons and are calculated off of the change in yields as detailed above.