To raise funds for public works projects, state and local governments typically issue bonds. When government agencies issue adjustable rate bonds, they are exposed to interest rate risk because the interest costs they must pay over the life of the bond vary with short-term interest rates. As interest rates rise, governments face increased expenses and pressure to raise taxes or service fees to pay for them.
Using MathWorks products, Intuitive Analytics has developed a set of quantitative tools that enables financial analysts to minimize the expected cost or risk a government incurs when managing a capital structure comprising debt and derivatives.
"Lacking more powerful analytical tools, analysts often assume and use a single short-term interest rate in a spreadsheet model with a 20-year analytic horizon. That’s like planning to wade across a river when all you know is that its depth is, on average, three feet," says Peter Orr, CEO of Intuitive Analytics. "With MathWorks tools, we have developed interest rate models and cash flow analytics for the tax-exempt market that enable analysts to work within a spreadsheet to determine how to best decrease expected cost, expected volatility, or cash flow at risk."