Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Price-Yield Relationship of a Callable Bond
The price-yield relationship of a non-callable or a non-puttable bond is convex because price and yield are inversely proportional. Figure 2 shows the price-yield relationship of a bond when it is callable and non-callable. The non-convex nature of a callable bond can be explained as follows.
From the definition of the callable bond, we know that a bond becomes callable only when the prevailing market yield is less than the coupon rate on comparable bonds. The price-yield curve of a bond is unaffected till the time it becomes callable. Investors may not be willing to pay the same price for a bond even when the coupon rate on the bond is just lower than the market yield as what would have been its price if it were a callable bond, for there is a possibility of a further drop in the market yield and the issuer may call the bond. As yields decline, there is an increasing possibility of the issuer calling the bond. Though the exact yield level at which the bond would be called may not be known, but the existence of such a level is certain. In Figure 2, for yield levels below y*, the price-yield relationship of a callable bond differs from that of a non-callable bond. For instance, the market yield is such that a bond would be selling for 107. But if it is a callable bond then it might be called at 105 and hence the investors will not be willing to pay 107. Even if the investors purchase at 107 and if the bond is called, then they get only 105 and hence there is a loss of 2 units per bond. For a range of yields below y*, there is price compression. Hereby price compression we mean that as yields decline price appreciation is limited. This portion of the price-yield relationship of a callable bond below y* is termed negatively convex because of the following reason. Increase in yields by a given number of basis points will result in a greater price decline compared to the price appreciation if yields decline by the same number of basis points.
This assignment is an analysis of a US publicly-traded company; its common stock could be a prospective investment. The report is due in Week 10, in needs to be at least 5 pages,
Letter of Credit (LOC) A popular bank instrument begins that a bank has granted the holder an amount of credit equal to the face amount of the L/C. A bank guarantees payment of
a) Year 2 Current Ratio = 700 / 300 = 2.33 : 1 Year 1 Current Ratio = 500 / 200 = 2.5 : 1 Year 2 Acid Test = (700 - 350) / 300 = 1.17 : 1 Year 1 Acid Test = (500 - 250) / 200 =
Q. Explain Safe Harbour Rule? Safe Harbour Rule - Concept in statutes and regulations whereby a person who meets listed requirements would be preserved from adverse legal actio
Explain the adjustments necessary to translate enterprise value to the total present value of common equity. To gain the value of the company's common stock add the value of th
Operating Budget It is a collection or set of formal financial documents that details expected expenses and revenues, as like all other expected operating and financial transac
Rationale of Accounting Standards Accounting Standards are created along with a view to harmonise various accounting policies and practices in use inside a country. The goal o
What is the Scope of IFRS 8 IFRS 8 applies to organisations who: Equity or debt instruments are traded in a public market (stock market) Is in the process of obtai
WHAT ARE THE MAIN VIEWS OF WACC PREVALENT IN THE FINANCIAL MANAGEMENT LITERATURE
Chi Square Test as a Test of Independence In real life decision making, managers often have to know whether the differences between the proportions observed from a number of sa
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!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd