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Bond's potential returns are calculated using measures like Yield to Maturity (YTM) and cash flow yield. Both these measures are not free from shortcomings. The problem with YTM is that we assume that the coupon payments are reinvested at a rate equal to the YTM and the bonds are held up to maturity. By these assumptions, we are ignoring reinvestment risk and interest rate risk. Reinvestment risk is the risk resulting from the fact that interest or dividends earned from an investment may not be reinvested in such a way that they earn the same rate of return as the invested funds that generated them. Interest rate risk is the risk of having to sell a security before its maturity date at a price less than the purchase price. Cash flow yield also ignores reinvestment and interest risk. It assumes that the projected cash flows are reinvested at the cash flow yield and the mortgage-backed or asset-backed securities are held until the final payout based on some prepayment assumption. The reinvestment risk is of utmost importance to mortgage-backed and asset-backed securities as payments from these securities are monthly and both the principal and interest should be reinvested. The assumption that projected cash flow is actually realized may not be true if the prepayment, default and recovery vary from such assumption.
How can we measure Total return- Measuring the Rate of Return Total return can be defined as: Total returns = (Cash payment received + Price change over the period) / Purcha
The call prices for various issues mentioned above are known as regular redemption prices. Point to be noted is that the regular redemption prices are above
Project Evaluation The expected value calculations are crucial to project investment decisions. The following example explains the use of probabilities in project evaluation.
Current Assets:- Stock of Raw-Materials :- [(Cost of yearly consumption Of raw material)*{ (Average Inventory holding period (weeks/months))}/(52 weeks / 12 months)]=
The straight value of a convertible bond is nothing but the value of a non-convertible bond having same characteristics. For example, assume that a company has tw
What are the Reasons why organisations grow Required to provide higher financial returns to investors e.g. increases the wealth of shareholders Possible to achieve econ
discuss the applicability of an operating cycle considering broilers?
Q. Future Value of a Series of Equal Cash Flows? Quite often a decision may result in the occurrence of cash flows of the same amount every year for a number of years consecuti
How would you judge the potential profit of Bajaj Electronics on the first year of sales to booth Plastics and give your views to increase the profit?
We have seen earlier that there are callable bonds. This is a valuable feature for the issuers who consider that their stock is undervalued enough so that selling
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