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

Duration and convexity of mortgage backed security, Duration an...

Duration and Convexity of MBS A graph decpicting the price of the security under study and the interest rates helps in assessing the duratio

What is business combinations, Q. What is Business Combinations? Combin...

Q. What is Business Combinations? Combining of two entities. Under PURCHASE METHOD OFACCOUNTING, one entity is deemed to attain another and there is a new basis of accountingfo

Explain about working capital funding policy, When considering how working ...

When considering how working capital is funding it is useful to divide assets into permanent current assets, noncurrent assets and fluctuating current assets. Permanent current ass

Building blocks of a pass-through security, The main aim of securitiz...

The main aim of securitization that was initiated in the late sixties was to resolve problems of mismatch and protect the US mortgage financing system from macroe

Advantages and disadvantages of accounting rate of return, Advantages of AR...

Advantages of ARR: It is simple to calculate and easy to catch. With the help of this technique, direct comparisons among proposed projected of varying lives with no bu

Linear programming, Linear programming, one of the ...

Linear programming, one of the important techniques of operations research, has been applied to a wide range of business problems. This techniqu

Answer, The standard cost of chemical mixture ~ PQ’ is as follows: 40% of m...

The standard cost of chemical mixture ~ PQ’ is as follows: 40% of material P @ Rs. 400 per kg. 60% of material Q @ Rs. 600 per kg. A standard loss of 10% is normally anticipated in

Price-yield relationship of a callable bond, Price-Yield Relationship of a ...

Price-Yield Relationship of a Callable Bond The price-yield relationship of a non-callable or a non-puttable bond is convex because price and yield are inversely proportional.

Why do businesses spend time effort and money, Why do businesses spend time...

Why do businesses spend time, effort, and money to produce forecasts?  Explain. Businesses fail or succeed depending on how well prepared they are to deal with the situations t

Convexity, Duration is good measure while estimating the percentage p...

Duration is good measure while estimating the percentage price change for a small change in interest rates but the estimation becomes inferior with the larger cha

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