Example on interest rate movements, Financial Management

Assignment Help:

Q. Example on interest rate movements?

Cap/floor volatility is consideration to be higher than swaption volatility because the market buys volatility trough swaptions as well as sells volatility trough cap/floors. Everything else being the similar the bid-ask difference should make cap/floor volatility a little higher.

(a) A callable bond has a higher coupon for the reason that the bond incorporates a short swaption. If rates drop below a level the issuer has the right to call the bond at par. From bondholder's viewpoint this is equivalent to selling a swaption. The choice holder has the right to get into a fixed receiver swap that pays the same coupon at the call date.

This embedded choice will have a premium and this premium will make the coupon of the callable bond higher. Investors may perhaps consider these higher coupons as yield enhancement and buy these bonds. Callable bonds are typically not callable for a certain period after the issue date. Throughout this period the investor will receive the high coupon regardless of the interest rate movements.


Related Discussions:- Example on interest rate movements

Determine the factors of auditors, Determine the factors of auditors Wh...

Determine the factors of auditors When anticipating to apply analytical review as a substantive procedure, auditors determine a number of factors like: Factor

Problems arising due to the existing structure, Problems Arising Due to the...

Problems Arising Due to the Existing Structure The problems that arise as a result of an increase in the population of older generation is universal in nature. Unless there are

Accrual bond, It is a bond that does not give periodic interest payments. I...

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 poin

Risk analysis, Your broker calls to offer you the investment opportunity of...

Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage-backed securities. The broker explains that these securities are entitled

Cost centre, a)   What are the pre-requisites of installation of responsibi...

a)   What are the pre-requisites of installation of responsibility accounting system? b)  Diffrence between 'cost centre' and 'profit centre'.

Operating leverage, Operating Leverage Operating leverage define the de...

Operating Leverage Operating leverage define the degree to which an organization cost of operation is fixed as opposed to variable. Therefore, it is a measure of how much a fir

Put option, Put Option This is a right which is granted in exchange for...

Put Option This is a right which is granted in exchange for an agreed-upon sum to sell property. Options are mostly used frequently in securities transactions it also used stoc

Defne iu.s. companies that benefit from a stronger dollar, What kinds of U....

What kinds of U.S. companies would benefit most from a stronger dollar in the foreign exchange market?  Explain. U.S. companies which import goods from other countries would bene

Purchasing and discounting of bills, Purchasing and discounting of bills is...

Purchasing and discounting of bills is the most important, from in which a bank lends without any collateral security. Present day commerce is build upon credit. The seller draws a

What is gatt, What is GATT, and what is its goal? GATT is the General A...

What is GATT, and what is its goal? GATT is the General Agreement on Tariffs and Trade it is a agreement that seeks to decrease trade barriers among participant nations.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

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!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd