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

Share price, what course a decrease and increase in share price

what course a decrease and increase in share price

Performance budget, Performance budget: it involves evaluation of the perf...

Performance budget: it involves evaluation of the performance of the organization in the context of both overall and specific objectives of the organization. As per the National I

Maturity risk premium is zero, The actual risk-free rate is 4%. Inflation i...

The actual risk-free rate is 4%. Inflation is likely to be 3% this year and 4% during the next 2 years. We suppose that the maturity risk premium is zero. What is the yield on 2

Importance of the government securities markets, Need to Widen and Deepen t...

Need to Widen and Deepen the Government Securities Market The importance of the Government Securities markets can be evaluated from three angles as follows: From the Gove

Negotiation with bidders, N egotiation You can also negotiate with the...

N egotiation You can also negotiate with the bidders based on the requirements as mentioned below. You can negotiate only with the lowest evaluated responsive and qualified

Prepayments, Principal repayment before the scheduled date is calle...

Principal repayment before the scheduled date is called a prepayment. Every individual borrower normally has the option to pay off all or part of their loan

Fundamentals of structured product engineering, Fundamentals of Structured ...

Fundamentals of Structured Product Engineering 1. (a) Let r m denote the m month swap rate (or Libor rate). Subsequently the 3 × n month forward rate f (3 ×n )

Free cash flow, Free Cash Flow Free cash flow presents the amount of ca...

Free Cash Flow Free cash flow presents the amount of cash generated by the existing operations of a corporation and that is not needed for reinvestment in new projects in the f

Required rate of return , Required Rate of Return (R i )  The required...

Required Rate of Return (R i )  The required rate of return (Ri) is the minimum rate of return that a project must generate if it has to receive funds.  It’s thus the opportun

Lookback options, Can you describe what the payoffs from lookback options d...

Can you describe what the payoffs from lookback options depend on? Can you write in a concise notation the payoff of a floating lookback call? a. What is the payoff of a portfol

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