Accrual bond, Financial Management

Assignment Help:

 

It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some point, the bond starts to pay both principal and interest on the basis of the accrued principal and interest to that point. 

When the bond starts to pay principal and interest on the basis of accrued principal and interest at that point then this is called as a Z tranche and is ordinary in collateralized mortgage obligations (CMOs). In a CMO that involves a Z tranche, the interest payments that else would be paid to the Z-tranche holder are utilized to pay down the principal of the other tranche. After that tranche is paid off, the Z tranche starts to pay down based on the original principal of the tranche added with the accrued interest. 

Parallel to a zero-coupon bond, an accrual bond or Z tranche has partial or no reinvestment risk. Though, accrual bonds, by definition, have a longer duration than bonds with the equal maturity that create regular interest or principal and interest payments. As such, accrual bonds are exposing to greater interest rate risk than bonds that make periodic payments over their full terms.

 

 

 

 


Related Discussions:- Accrual bond

Explain the meaning of compound interest compounded yearly, $7000 are inves...

$7000 are invested at 5% per annum compound interest compounded yearly.  What would be the amount after 20 years? Solution Here i = 0.05, P = 7000, and n = 20. Putting it i

Contrast a benefit and a defined contribution pension plan, Compare and con...

Compare and contrast a defined benefit and a defined contribution pension plan. In defined benefit plan retirement remuneration are determined by a formula that typically

Operating cycle, disscus the applicability of operating cycle in vegetable ...

disscus the applicability of operating cycle in vegetable in uganda

Explain benefits of investing via international mutual funds, What are the ...

What are the benefits of investing via international mutual funds? Answer:  The benefits of investing via international mutual funds consist of: (a) Save transaction or info

What are the characteristics of the financing decision, What are the Charac...

What are the Characteristics of the financing decision There are two characteristics of the financing decision. First, theory of capital structure which illustrates theore

How could we obtain an indisputable discount rate, How could we obtain an i...

How could we obtain an indisputable discount rate? How should we calculate the beta and the risk premium? There is no indisputable discount rate: a discount rate is a subjectiv

Merits of net present value method, Q. Merits of net present value method? ...

Q. Merits of net present value method? Merits of NPV method:- (i) Time value of funds is taken into consideration: - For the reason that this method takes into account the t

What is the rationale of the double-play strategy, Q. What is the rationale...

Q. What is the rationale of the double-play strategy? The hedge funds deploy a double-play strategy in order to engineer steep increases in interest rates and steep declines in

Long and short dated volatility, Q. Long and short dated volatility? 1....

Q. Long and short dated volatility? 1. If an investor purchase long-dated volatility as well as sells short-dated volatility then the investor is expecting a decrease in the sh

Laspeyres method, Laspeyres Method Laspeyres method uses the quantities...

Laspeyres Method Laspeyres method uses the quantities consumed during the base period in computing the index number. This method is also the most commonly used method which inc

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd