Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
The main drawback of the tradition approach of valuation is that it discounts every cash flow using the same discount rate. For example, let us take 5-year (7.00 per cent) Treasury security (maturing in 2010). The cash flow per Rs.100 of par value would be a payment of Rs.3.50 every six months and Rs.103.50 tenth 6-month period from now. However, the best way to see the 5-year 7% security is as a package of zero-coupon bonds whose maturity value and date is the amount and date of cash flow respectively. Thus, 5-year, 7% security should be viewed as 10 zero-coupon bond. The main reason is that it does not allow a market participant to realize an arbitrage profit by taking apart or "stripping" a security and selling off the stripped securities at a higher aggregate value it would cost to purchase the security in the market. This approach is known as an arbitrage-free valuation approach.
The difference between the traditional and arbitrage-free valuation approach is explained in the table 5.
Table 1: Comparison of Traditional Approach and Arbitrage-Free Valuation Approach in 7% Treasury Security
Period (6 month each)
Discount (Base Interest) Rate
Cash Flows per Rs. 100 of par value
Traditional Approach
Arbitrage-Free Valuation Approach
1
5-year Treasury rate
1-period Treasury spot rate
3.5
2
2-period Treasury spot rate
3
3-period Treasury spot rate
4
4-period Treasury spot rate
5
5-period Treasury spot rate
6
6-period Treasury spot rate
7
7-period Treasury spot rate
8
8-period Treasury spot rate
9
9-period Treasury spot rate
10
10-period Treasury spot rate
103.5
Under traditional approach interest rate on the bond is the yield of 5-year treasury security. In arbitrage-free approach the interest rate for a cash flow is the theoretical rate that the treasury security has to pay if it issued as a zero-coupon bond with maturity date equal to the maturity date of the cash flow. So, it is necessary to decide the theoretical rate that the treasury security has to pay on a zero coupon for each maturity. Zero-coupon treasury rate is also known as 'Treasury Spot Rate'. In the next chapter, we will understand how to calculate the treasury spot rate. When the value of a bond is calculated based on spot rate, the resulting value is known as arbitrage-free value.
a) Year 2 Year 1 Stock turnover (350/500) * 365 = 255.5 days (250/450) * 365 = 202.7 days
Question 1: (i) Critically explain and analyse the Lewis model of economic development. (ii) Compare and contrast the neoclassical growth model and the new growth theory.
Current Assets:- Stock of Raw-Materials :- [(Cost of yearly consumption Of raw material)*{ (Average Inventory holding period (weeks/months))}/(52 weeks / 12 months)]=
This case has been framed in order to test the skills in evaluating a credit request and reaching a correct decision. Perluence International is large manufacturer of petroleum and
1. Of course a swaption will be needed. The major reasons being that Bond A is callable after 3 years and matures in 4 years whereas Bond B matures in 5 years. It is understandable
QUESTION i) Discuss the risk associated with changes in exchange rates. ii) How can these risks be managed internally? iii) Explain how a manager can use a forward contra
Explain Capital Budgeting and its methods.
Q. What is FV of a Single Present Cash Flow? the future value of a single cash flow is defined in term of equation as follows: FV = PV (1 + r)n Where, FV = Future value PV = Pr
Question 1 Briefly explain the important legislations that regulates the insurance sector Question 2 What do you mean by sales cycle? Briefly explain the different stages in
State the Analytical procedures at the planning stage Auditors must apply analytical procedures at the planning stage to help in understanding the entity's business, in identi
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!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd