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# JAVELIN Mortgage Investment Corp. Message Board

• lenloc lenloc Jul 15, 2013 1:24 PM Flag

## Question for eugene

Can u explain in simple terms if,why and how a lower book value affects the earnings &/or dividend (not yield) if the spread remains constant or even increases?

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• Check this out. Google: Duration of a Bond: The Calculation and select the youtube link, 3rd one down, has a picture of an excel screen in the thumbnail.

First couple of minutes the presenter tap dances around. But eventually he gives a perfect example of Duration. Duration as I was saying in my other message a week ago is really how book value is impacted when interest rates move. JMI has thousands of loans and each loan has a duration. The weighted average duration for JMI is 1.71 years. Thus a change in 1% interest rates means it will take 1.71 years of cash flow to make that up.

When 1.71 years = 1% change in interest rates you take 1.71*2.76= \$4.72. \$20- \$4.72 = \$15.28. JMI should sell for \$15.28 today. Give or take the multitudes of other variables at play here.

• I bet Alkkov could provide a better answer than me.

• A drop in book value may force real assets to be sold according to debt covenant ratios assessed by JMI's lenders. This would be the reason the shorts are using words like insolvent and bankrupt and margin calls etc... A forced liquidation of assets (while resulting in a better asset to debt ratio) would change the current earnings mix. Did they sell high spread assets, did they sell low spread assets? Alternatively to selling assets to meet such a covenant; JMI could have another SPO. Bolstering cash is a way to improve debt ratios.

According to swaps and swoptions (which I am not qualified to analyze) some/most of a drop in book value would be offset by movements in the hedging tools employed by JMI. So if they had to sell assets which by itself (let's just say) would equate to 5 cents less per dividend (.23 to .18) the hedging efforts and swaps and swoptions should mitigate most of that drop allowing JMI to receive the positive cash flows from those hedges and then reinvest them at prevailing spread conditions. Let's just say that is enough to continue a .23 dividend. Even though a balance sheet might calculate to insolvency, the only real way for a bond do be insolvent is for the cash flow to stop and principal face value to be uncollected because the homeowner is in default.

Holding these mREIT assets to maturity will yield the spread indicated. But according to GAAP an insolvent balance sheet would cause some issues. LIke it did for the big banks. The difference is our paper isn't garbage, our paper has been re-valued in the short term. The face value of these short term drops in value will slowly rise as maturity approaches.

Maybe follow up with questions at this point, I might get off on a tangent.

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