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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.
How are financial trades made on an organized exchange? Every exchange-listed security is traded at a precise location on the trading floor called the post. The trading is mana
Advantages: It is easy to calculate and catch. With the help of this technique, projects can be ranked in terms of their economic merits without much of complication.
38. The optimum capital structure is the one with i) highest value of the firm ii) Lowest value of the firm iii) highest shares in numbers iv) highest debt
(a) Find the nominal rate of interest j compounded quarterly which is equivalent to a 5% e ective rate of interest. (b) Which one will deliver a higher future value on a deposit
On January 1 a bond with face value of $1,000 is for sale in the market. That bond has a coupon rate of 6%, pays interest only once a year and the end of the year, and matures at
What is the Modigliani-Miller's irrelevance hypothesis in dividend decision making? Critically evaluate its assumption.
The issuer of the bond has to repay the bondholders the principal by the stated maturity date. This can be repaid by the issuer in one lumpsum payment at the matu
Q. Reinforced concrete design? In BS8110 for reinforced concrete design, it is stated that longer tension lap lengths have to be provided at the top of concrete members. The mo
We have seen earlier that there are callable bonds. This is a valuable feature for the issuers who consider that their stock is undervalued enough so that selling
We have seen the valuation of bonds with embedded option using binomial model. This method can be used when cash flows do not depend on how interest rates evolve.
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