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After the calculation of cash flow yield and the average life of the asset-backed and mortgage-backed security based on default, prepayment and recovery assumptions, the next thing to do is to compare the yield to a benchmark yield. Benchmark yield is the yield of treasury security which has the same maturity as the security's average life. Nominal spread is defined as the difference between cash flow yield and the yield of a comparable Treasury security. A normal spread has certain disadvantages. A part of nominal spread is compensation for accepting prepayment risk. Let us consider CMO support tranches that have been offered at a huge nominal spread. As we have seen earlier, nominal spread embodies substantial prepayment risk associated with support tranches. If a manager buys these CMO support tranches based on nominal spread, he will not succeed in determining whether or not the offered nominal spread is an adequate return given the substantial prepayment risk the support tranche holder has faced. Therefore, the manger should use measures like option-adjusted spread to indicate the potential compensation after adjusting for prepayment risk.
Compare and contrast a defined benefit and a defined contribution pension plan. In a defined benefit plan, retirement benefits are defined by a formula that generally considers t
as a financial analyst, you must evaluate a proposed project to produce printer ink. the equipment would cost 60000 plus 10000 for installation. annual sales would be 5000 units at
Example: - MM Foam Company at present has 5000 outstanding shares selling at Rs. 100 each. The firm suppose to have a net earning of Rs. 50000 as well as contemplating a dividend
AIM OF FINANCE FUNCTION The fundamental aims of a modern finance function are: Acquiring enough funds when required at lower cost. Proper use of funds in projects w
Internal Rate of Retur n The discount rate at which the net current value (the value of all future cash flows, in excess of the real investment, expressed in today's d
Ask queswtion #Minimum 100 words accepted# what are the characteristics of debt finance? What are the similarities and differences between debt finance and ordinary share capital
aggressive policy
Q. Evaluate Cost of Irredeemable Debt subsequent to tax? Cost of Irredeemable Debt subsequent to tax: - When a company utilizes debt as a source of finance then it saves a cons
Calculate Current cash debt coverage ratio: Financial statements for Delta Company are presented below: Delta Company Balance Sheet December 31, 2012
Define the P/E valuation method. Under what circumstances should a stock be valued using this method? The P/E ratio specifies how much investors are willing to pay for each dol
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