12 Dec
Immunization of Bonds | CA Final SFM
Investment in bonds cannot be considered completely risk free. Such investment can have the following two types of risk:
- Interest Rate Risk
- Reinvestment Risk
1. Interest Rate Risk
- Such risk arises when interest rate prevailing in market increases.
- This will cause an increase in the expectation for the bond holder.
- As a result, the discounting rate i.e. DYR increases and the present value of bond decreases.
2. Reinvestment Risk
- Such risk arises when interest rate prevailing in market decreases.
- As a result, the bond that is currently held will have increase in its value.
- However, once the bond is redeemed, the investor gets the redemption price in hand.
- The investment of such amount cannot be made at the earlier coupon rate and the reinvestment will be at a lower rate resulting into reduced income for the investor.
Immunization of bond is a process of creating a bond portfolio through which the interest rate risk and reinvestment risk can be either eliminated or minimized.
Note
Immunization cannot be achieved through single bond and creating a bond portfolio is necessary for immunization.
Tips by CA Harish Wadhwani (Scored 93 marks in SFM)
February 02, 2021
Securitization CA Final SFM (Strategic Financial Management)
February 02, 2020
Things you should do before your CA Final Exams
April 04, 2019
Latest Posts
Tips by CA Harish Wadhwani (Scored 93 marks in SFM)
Congratulations…!! CA Harish Wadhwani for scoring 93 marks in SFM (CA Final)
Securitization CA Final SFM (Strategic Financial Management)
Securitization CA Final SFM Securitisation a chapter in Strategic Financial Management (SFM). This is an important chapter from the CA Exam point of view as well. The concept has been explained with a comprehensive example, to make sure the concepts are very clear. It mainly talks about Debt Securitisation, Mortgage-Backed Securities, Securitisation Process, Credit Rating Continue reading
Things you should do before your CA Final Exams
Things you should do before your CA Final Exams Clearing CA Final Exam is clearly not a simple cake walk. You need to be extremely committed to attending your CA final coaching classes. As the subjects are numerous, you need to study your lessons as and when they’re taught your respective CA final Coaching class. Continue reading
CA Final SFM, quick preparation tips
CA final SFM has a few topics which carry a fine weight-age in each trial which are Foreign Exchange Risk Management, Capital Budgeting, Derivatives, and Portfolio Management. But in its place of starting with a topic keeping huge concepts start with a bit lighter note and extremely interesting niche i.e. Bold Valuation. Thereafter full acquisition Continue reading
Two Way Quotes | Forex | CA Final SFM
A Two way Quote indicates a set of two different rates of exchange known as Bid Rate and Ask Rate. In a Two Way Quotes, the rate at which bank will buy the currency and the customer will sell the currency is known as Bid Rate. The rate at which bank will sell the Continue reading
What is an Exchange Rate | Direct Quote & Indirect Quote
Exchange Rate A rate at which one currency can be exchanged with the other. It is a rate at which one currency expressed in terms of the other. It is a rate at which a currency can be bought or sold. Direct Quote & Indirect Quote
Corporate Valuation Basics | CA Final SFM
Need for Corporate Valuation Along with the enterprise growth, number of stakeholders also grows. Presentation of annual financial statements becomes. Curiosity of the stakeholders to understand the ‘true worth’ of their enterprise becomes translated to the concept of ‘valuation’. The market analysts, financial intermediaries, and the academicians, also attempt to apply their valuation approaches Continue reading
Interest Rate Futures | Derivatives | CA Final SFM
When Forward Interest Rate Agreements are regulated through the “Exchange”, it will become Interest Rate Futures. However, the mechanism of IRF is different from FRA. The system is designed in a manner that interest rate is made up as a marketable product. The following example, will clarify as to how interest rate futures are Continue reading
