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!
Various bond features largely affect the degree of correlation between the bond's prices and the bond's interest rates. Some of the bond features that affect bond's interest rate risk are - maturity, coupon rate and embedded options.
Maturity Period: The degree of bond price sensitivity to its interest rate changes depends upon its maturity period. Longer the maturity period of the bond, greater would be the price sensitivity to change in the interest rate of the bond, assuming that all other factors to be constant.
Coupon Rate: Assuming that all other factors are constant, the degree of bond price sensitivity to its interest rate changes depends upon its coupon rate. Higher the coupon rate, lower is the degree of sensitivity to changes in interest rates and vice versa. Further, zero coupon bonds tend to have higher price sensitivity to interest rate changes compared to the bonds having a coupon rate.
Embedded Options: The value of the bond with embedded option will depend on how the value of the embedded option changes with the interest rates. For example, let us consider a callable bond. We know that when interest rates decrease, the price of an option-free bond increases. However, in a callable bond, an increase in price is not as much as it is in an option-free bond. Let us try to understand this by separating the price of a callable bond into two parts.
Price of callable bond = Price of option-free bond - Price of embedded call option
The price of embedded call option is deducted because it is of value to issuer; but for an investor it is a disadvantage. Therefore, the price of a callable bond is less when compared to the price of an option-free bond. Now, when interest rates decrease, the call option value increases because it becomes more valuable to the issuer; and when interest rate decreases, both the price of option-free bond and the price of call option increase. This results in a relatively lesser change in the price of a callable bond when compared to the change in the price of option-free bond.
Assemble all other inputs/assumptions based on the past data. Use your best judgment to have the most reasonable estimates. Tasks 1. Prepare an Excel spreadsheet containi
Question 1 Describe the functions of merchant banking and functions of financial intermediaries Question 2 What do you understand by book building and Green shoe option
What are the benefits and drawbacks of financial hedging of the firm’s operating exposure vis-a-vis operational hedges (like relocating manufacturing site)? Answer: Financial he
How do tax considerations affect the cost of debt and the cost of equity? As interest on debt is tax deductible to the issuing firm, as much higher the tax rate the lower the aft
Q. Nature of Financial Management? Financial Management is an necessary part of Top Management: - In the contemporary business management the financial manager is one of the ac
a) Social marketing is the use of normal marketing methods to achieve the benefits of social change, such as informing the public about the harm of under-age drinking, rather than
Q. What do you mean by Accrued Expenses? Accrued expenses are the expenses which have been incurred but not yet due and hence not yet paid also. These simply represent a liabil
Explain the significance of the term additional funds needed. While the pro forma balance sheet is completed, total assets and total liabilities and equity will hardly match.
Suppose you have recently been contracted as a financial consultant to a London-based engineering company, Alpha Products Plc. The company uses three components as part of their pr
Public Provident Fund (ppf) The Public Provident Fund (PPF) scheme was started in 1968-69 with the aim to provide a financial instrument to workers in the unorganized sector to
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