If you need to repay the bond's principal now (as SVB does), then you lose the extra interest you need to pay on the money you'll borrow today until you get the full principal back at maturity. You don't lose money if you can borrow money at the same rate as the bond coupons pay, you lose money if now the interest is higher. You can't simply treat dollars-after-X-years as equivalent to dollars-now, those are two different 'currencies' and the former is worth less.
> extra interest you need to pay on the money you'll borrow today until you get the full principal back at maturity
Thank you, great concise explanation, lightbulb moment for me. I understood it but couldn't clearly communicate it.
So to make depositors whole today, you need to borrow money today, and the extra interest paid to borrow the money is more than the interest you get when the long-term bonds finally mature. The difference is the loss.
Which is why they had to take a loss on selling the bonds, as it's essentially the same loss. They are out money whether they sell the long-term bonds today, or if they borrow money today. Bonds are discounted appropriately by whomever buys them.
Question is, why didn't SVB do anything when they saw this coming? I've seen articles saying the board was aware of the risk issues for the past year. [1]
> If you need to repay the bond's principal now (as SVB does)
Not anymore. Now the question is, how does the government make depositors whole? I doubt they will go flog the bonds on the open market or get loans at market rate like idiots. The point of this intervention is to bypass the market mechanisms that caused this and put the government as a backstop.
