Accrual bond, Financial Management

 

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.

 

 

 

 

Posted Date: 7/27/2012 7:51:17 AM | Location : United States







Related Discussions:- Accrual bond, Assignment Help, Ask Question on Accrual bond, Get Answer, Expert's Help, Accrual bond Discussions

Write discussion on Accrual bond
Your posts are moderated
Related Questions
A trade is assessed on the basis of its performance. Performance can be defined as the expected total return over and above the investment horizon of the trade. T

The purchase price is expected to be in the region of £30m - £40m now (year 0 ?? 2003) and further cash flow effects might include: ?? Annual cash inflows from New You ?? in a rang


Pension funds Pension funds offers retirement income in the form of annuities to employees covered by a pension plan. They obtain contributions from employers or employees and

Q. Process of financing working capital? Working capital policies on the process of financing working capital can be characterised as moderate, conservative and aggressive. A c

(a) The subsequent is a discussion based upon IFR Special Report in issue 1239 during the Year 1998. Danish mortgage bonds have extended been domestic investors' referred d

The price-yield relationship of a non-callable or a non-putable bond is convex because price and yield are inversely proportional. Figure 1 shows the price-yield

Question 1: (a) Briefly explain the Electronic Data Interchange (EDI), and list the benefits of EDI. (b) List and describe the main components of MACSS. (c) Explain brief

Fixed Costs The costs a rigid incurs doing business that do not change in relation to production. Rent, for example, is a fixed cost because it remains constant whether product

explain the assumptions underlying Walter''s dividend model?