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.
Assume today is 3 December 2009. Helen is 30 years old and has a Bachelor of Business. She is currently employed as a personal banker for ANZ banking group in Sydney and earns $380
Traditional Capital Budgeting Techniques These techniques are usually very simple and easily catchable. But the fundamental drawback of these methods is that they don't cons
What action(s) should be take place if analysis of pro forma financial statements reveals positive trends? Negative trends? While analyzing the pro forma statements, managers fre
Q. Problem in the determine of cost of the capital? Conceptual controversies regarding the relationship between the cost of the capital and the capital structure: different the
what is mean by breakeven point
The following treasury issues can be included for the construction of the curve: On-the-run treasury issues. On-the-run treasury issues and sele
Sensitivity Analysis A test of an organizations performance projections based on varying the key assumptions which is used for forecast performance.
T = 520O per week. L=60000. Standard deviation = 7500 R =0.0004.F =50.Find the optimal average cash balance base don the miller orr model
Illustration Consider a Rs.1,000 par value bond whose current market price is Rs.850. The bond carries a coupon rate of 8% and has a maturity period of 9 years. Wha
Determination of Credit Terms:- The second feature of receivable management, subsequent to setting the credit standards and assessment of credit worthiness of the customers, i
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