Term Structure of Interest Rates 4 by Edu Pristine

Author of lecture Term Structure of Interest Rates 4

Edu Pristine

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... price of the stock and the strike price of the option. Puts will get exercised in the case of rising interest rates and floors guarantee a minimum payment in a falling rate environment. Because of the value of the call or the put to either the issuer or the holder, the value of bonds with an embedded option can be thought ...

... of future cash flows that depend on uncertain future interest rates. This is called expected yield volatility. Volatility has the effect of making options more valuable but because of the relationship between the value of a put and a call to ...

... flows will fluctuate as interest rates change. Effective duration can be estimated using modified duration if the bond with embedded options behaves like an option-free bond. This behaviour occurs when exercise of the embedded option would offer the investor no benefit. ...

... the portfolio is exposed increases. As convexity decreases, the exposure to market interest rates decreases and the bond portfolio can be considered hedged. In general, the higher the coupon rate, the lower the convexity (or market risk) of a bond. This is because ...

... a security payment to match its market price. OAS is hence model dependent. This concept can be applied to mortgage-backed security (MBS), option, bond and any other interest-rate derivative. In the context of an MBS, the option relates to the right of property owners, whose mortgages back the ...

... cannot be overcome by using only one model and hence we need to look for the specific data which we can modify in ...