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We have earlier studied that the investor may have to carry cash for some time because of discrepancies arising between the timing of the bond's cash-flow and the liability. Suppose we assume that he can borrow for a short time period, then he can depend on cash flow occurring after a liability to cover it. Constructing a bond portfolio with cash-flow around rather than prior to the maturities of the liabilities is less restrictive. Hence it should be easier and cheaper. This strategy is based on the assumption of cost of borrowing cash. If the cost is actually higher than the assumed cost, then the risk of being short to fund the liabilities may arise.
Callable bonds must be avoided as they may bring in uncertainty in the bond portfolio cash flow.
Excluding default risk.
Assume a 10% discount rate with respect to both the bonds.
Collateralized Mortgage Obligations (CMOs) CMOs retain many of the yield and credit quality advantages of pass-throughs, while eliminating some of the
Illustration The monthly yield of a mortgage backed security is 0.75%. Find out the annual yield for this security. Solution Annual yield = 2 [(1 + 0
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how control the steps
A callable bond is similar to an Option-free bond with a call option from the bondholder. It can be thought of as the sale of a call option by the investor
A bond investor is always exposed to credit risk. Credit risks can be classified into three types. They are: Default Risk Credit Spread Risk
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Q. Show Function of the Financial decision? Financial decision: the second major decision is involved in financial management is the financial decision the investment decision
You know that Treasury bills have a beta of 0 because they are risk-free. A portfolio of technology stocks has a beta of 3. You plan to invest 40% of your investment capital in T
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