Limitations of the cash flow yield measure, Financial Management

Assignment Help:

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. 


Related Discussions:- Limitations of the cash flow yield measure

Problems using walter''s model, the following information related to sun lt...

the following information related to sun ltd.paid-up capital-1000000. earnings of the co-100000. dividend paid-80000. price-earning ratio(pie)-20. no of equity shares-100000.find o

Define major causes for the current account deficits, The United States has...

The United States has experienced continuous current account deficits as the early 1980s. What do you think are the major causes for the deficits? What would be the results of cont

Types of frns, Types of FRNs In an era of innovations, while changing n...

Types of FRNs In an era of innovations, while changing needs and preferences of the investors trigger introduction of newer FRNs, the borrowers' funding specifications also nec

Primary market, Primary Market In an economy, at a given point of time, ...

Primary Market In an economy, at a given point of time, there will be people/entities called savers the surplus units, whose current income exceeds their current expenditure whi

zero salvage value, Big Joe's is changing a piece of equipment.  The equip...

Big Joe's is changing a piece of equipment.  The equipment will cost $5,000 and has a 5 year life.  The equipment can be leased for annual payment of $1,295 paid at the starting of

Sources of return, When an investor invests in fixed income sec...

When an investor invests in fixed income securities, he receives returns from one or more of the following sources: Coupon Interest payment.

Explain about cash flow statement, Q. Explain about Cash Flow Statement? ...

Q. Explain about Cash Flow Statement? Cash Flow Statement: - This is another process of cash management. A cash flow statement is the statement showing inflows as well as outfl

Determination of values price and volume, Determination of values The v...

Determination of values The values for which NPV turns into zero are found by calculating the break-even values for the selected variables. Once determined these give an indica

Semester 1, which type of financing is appropriate to each firm

which type of financing is appropriate to each firm

Cvp, Info on applying CVP to product mix limiting factors

Info on applying CVP to product mix limiting factors

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