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The first step in valuation process is to estimate the cash flows that are expected to be received in the future. In debt securities, there are two types of possible cash flow: Interest and principal repayment. The estimation of cash flow is not easy excluding few securities such as government-dated securities. Government dated securities have known interest payments, so estimating cash flow becomes very easy for these kinds of securities. However, there are securities coming with different types of options; estimating cash flow for these securities is a little difficult. Examples of these kinds of securities are as follows:
Securities with an option to issuer or investor, to change the contractual due date of repayment of principal. For example, Callable bonds, Putable bonds, Asset-backed securities and Mortgage-backed securities.
Securities in which coupon payment is fixed periodically based on a formula that depend on some reference rates, prices or exchange rates. For example, Floating-Rate Securities etc.
Securities that give choice to the investor to convert the securities into shares. For example, convertible bonds, exchangeable bonds etc.
Finance companies Finance companies make loans to individuals as well as corporations by providing consumer lending business lending also mortgage financing. A few of their loa
Active bond management depends on an economic scenario in order to forecast the movements of yield curve. A portfolio manager skillfully builds a portfolio wit
Interest rate risk is the risk wherein the investor in bonds faces the risk of a fall in his bond price as and when there is a rise in the market interest r
How do we calculate the payback period for a proposed capital budgeting project? What are the major criticisms of the payback method? We compute the payback period for a proposed
Dividend yield Dividend yield = (Dividend per share/Market share price) x 100% Dividend yield is the cash return on the share (not whole return which is cash dividend and ca
Exchange Requirements To ensure money supply, some central banks require some or all of its foreign exchange receipts (generally from exports) be exchanged for the local curren
What is meant by the terms that an option is in-, at-, or out-of-the-money? Answer: A call or put option with S t > E (E > S t ) is considered to as trading in-the-money. If
There are two approaches to value Asset-Backed Securities. They are: Zero-Volatility Spread (Z-spread) Approach. Option-Adjusted Spread
Size of the business / scale of the operation : the working capital requirement of the concern are directly influence the by the size of the business which may be measured in the
Due to the complexity of the tasks involved in many projects, communication of responsibility for those tasks is often helped by means of graphical planning techniques.
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