Derivative Instruments

6 Months Ended

Jun. 30, 2014

Derivative Instruments [Abstract]

Derivative Instruments

9. Derivative Instruments

Interest Rate Swap and Swaption Agreements

To help mitigate exposure to higher short-term interest rates, the Company uses currently-paying and forward-starting, three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. Additionally, the Company enters into interest rate swaption agreements which gives the Company the right, but not the obligation, to enter into a previously agreed upon swap contract on a future date. If exercised the Company will enter into an interest rate swap agreement and is obligated to pay a fixed rate of interest and receive a floating rate of interest. These swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company's effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates.

The Company's interest rate swap agreements and interest rate swaption agreement have not been designated as hedging instruments.

TBA Securities

The Company may, and has in the past, entered into TBA contracts as a means of acquiring exposure to Agency RMBS and may, from time to time, utilize TBA dollar roll transactions to finance Agency RMBS purchases. The Company may also enter into TBA contracts as a means of hedging against short-term changes in interest rates. The Company accounts for its TBA contracts as derivative instruments due to the fact that it does not intend to take physical delivery of the securities. The Company had no exposure to TBA contracts at any time during the three and six months ended June 30, 2014. During the three months ended June 30, 2013, the Company paired off purchases of TBA securities with a combined notional amount of $388.0 million by entering into simultaneous sales of TBA securities and as a result, realized gains of $0.9 million and recognized unrealized losses of $4.1 million. During the six months ended June 30, 2013, the Company paired off purchases of TBA securities with a combined notional amount of $473.0 million by entering into simultaneous sales of TBA securities and as a result, realized gains of $0.8 million and recognized unrealized losses of $3.7 million. For the three and six months ended June 30, 2013, the Company recognized unrealized losses of $1.4 million and $1.4 million, respectively on TBA securities that had not been paired off at June 30, 2013.

Conversion Option - 8% Exchangeable Senior Notes Due 2016

Changes in the fair value of the conversion option derivative related to the Exchangeable Senior Notes are recorded through earnings.

Derivative Instruments

The following table summarizes information related to derivative instruments at June 30, 2014 and December 31, 2013:

Non-hedge derivatives	June 30, 2014		December 31, 2013
Notional amount of interest rate swaption	$	225,000,000	$	-
Notional amount of interest rate swaps		17,200,000		17,200,000
Total notional amount	$	242,200,000	$	17,200,000

The following table presents the fair value of the Company's derivative instruments and their balance sheet location at June 30, 2014 and December 31, 2013:

Derivative instruments	Designation	Balance Sheet Location	June 30, 2014			December 31, 2013
Interest rate swaption	Non-hedge	Derivative assets, at fair value	$	368,136		$	-
Interest rate swaps	Non-hedge	Derivative (liabilities)/assets, at fair value	$	(442,585	)	$	284,454
Exchangeable Senior Notes
conversion option	Non-hedge	Derivative liabilities, at fair value	$	(1,107,544	)	$	(1,471,607	)

The following table summarizes gains and losses related to derivatives:

		Three Months Ended						Six Months Ended
	Income Statement
Non-hedge derivatives	Location	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
	Gain/(loss) on derivative
Interest rate swaption	instruments	$	(1,893,322	)	$	-		$	(4,435,614	)	$	-
	Gain/(loss) on derivative
Interest rate swaps	instruments	$	(482,794	)	$	8,272,229		$	(940,079	)	$	8,216,927
Exchangeable Senior Notes	Gain/(loss) on derivative
conversion option	instruments	$	473,167		$	-		$	364,063		$	-
	Gain/(loss) on derivative
TBAs(1)	instruments	$	-		$	(4,573,848	)	$	-		$	(4,237,402	)

____________________
 

(1) Gains and losses from purchases and sales of TBAs consist of $0.8 million of net TBA dollar roll net interest income and a net loss of $5.4 million due to price reductions.

The following table presents information about the Company's interest rate swaption agreement at June 30, 2014:

	Notional
Swaption Expiration	Amount		Strike Rate	Swap Maturity
2015	$	225,000,000	3.64%	2025

Restricted cash at June 30, 2014 included $4.4 million of cash pledged as collateral against an interest rate swaption agreement.

     The following table presents information about the Company's interest rate swap agreements at June 30, 2014:

			Weighted	Weighted	Weighted
	Notional		Average Pay	Average	Average Years
Maturity	Amount		Rate	Receive Rate	to Maturity
2023	$	17,200,000	2.72%	0.23%	9.1
Total/Weighted average	$	17,200,000	2.72%	0.23%	9.1

Restricted cash at June 30, 2014 included $1.2 million of cash pledged as collateral against interest rate swap agreements.

The following table presents information about the Company's interest rate swap agreements at December 31, 2013:

			Weighted	Weighted	Weighted
	Notional		Average Pay	Average	Average Years
Maturity	Amount		Rate	Receive Rate	to Maturity
2023	$	17,200,000	2.72%	0.24%	9.6
Total/Weighted average	$	17,200,000	2.72%	0.24%	9.6

Restricted cash at December 31, 2013 included $0.8 million of cash pledged as collateral against interest rate swaps.