Maturity date

The advantage of using common stock to finance assets is that it does not incur nxed interest charges. Furthermore, there is no maturity date, as there is with all loans and most preference issues. Common stock can often be issued more easily than debt can be financed. However, the flotation costs of common stock can be quite high, especially when stock values are depressed, so that large discounts for the stock are needed to induce purchase. 

Bond A long-term debt-type of security generally issued by corporations or governments to generate cash. The coupon rate is the interest rate paid to the bondholder. The maturity date is when the face value of the bond will be paid to the bondholder. 

Factoring, in its purest form. .. involves only the purchase of ac-coimts receivable (or "receivables") by the factor from the party (called the "client") with whom it h a hictoring contract. The client assumes all risks of nonpa3maent of the receivable except the "financial inability of the account debtor (customer) to pay.". .. The factor agrees to pay on a monthly basis for purchased receivables at a date computed under the contract, usually called the "average maturity date" or adjusted average maturity date. The customer is immediately notified of the sale of the receivable to the foctor and is instructed to make all payments directly to the factor. ... 

To avoid any discretization bias we use the exact Gaussian distribution of the random variable at the maturity date Tq. 

Similar maturity date (4 October 2021 for HERIM and 3 December 2021 for TKAAV) ... 

The continuously compounded gross redemption yield at time ton a default-free zero-coupon bond that pays 1 at maturity date 7 is x. We assume that the movement in X is described by... 

Under these four assumptions, the price of an asset can be described in present value terms relative to the value of the risk-free cash deposit M, and, in fact, the price is described as a Q-martingale. A European-style contingent liability with maturity date t is therefore valued at time 0 under the risk-neutral probability as... 

We can define forward rates in terms of the short rate. Again for infinitesimal change in time from a forward date TitoT (for example, two bonds whose maturity dates are very close together), we can define a forward rate for instantaneous borrowing, given by... 

One final point regarding duration is that it is possible to calculate a tax-adjusted duration for an index-linked bond in markets where there is a different tax treatment to indexed bonds compared to conventional bonds. In the United States market, the returns on indexed and conventional bonds are taxed in essentially the same manner, so that in similar fashion to Treasury strips, the inflation adjustment to the indexed bond s principal is taxable as it occurs, and not only on the maturity date. Therefore, in the US-indexed bonds do not offer protection against any impact of after-tax effects of high inflation. That is, Tips real yields reflect a premium for only pretax inflation risk. In the United Kingdom market however, index-linked gilts receive preferential tax treatment, so their yields... 

The drawbacks of each of these approaches are apparent. A rather more valid and sound approach is to constmct a term structure of the real interest rates, which would indicate, in exactly the same way that the conventional forward rate curve does for nominal rates, the market s expectatimis rat future inflation rates. In countries where there are liquid markets in both conventional and inflation-indexed bmids, we can observe a nominal and a real yield curve. It then becomes possible to estimate both a conventional and a real term structure using these allows us to create pairs of hypothetical conventional and indexed bonds that have identical maturity dates, for any point on the term structure. We could then apply the break-even approach to any pair of bonds... 

Expression (7.1) states that the price of a zero-coupon bond is equal to the discount factor from time t to its maturity date or the average of the discount factors under all interest-rate scenarios, weighted by their probabilities. It can be shown that the T-maturity forward rate at time t is given by... 

However, according to the optimal conversion strategy, the investor maximises the value in each node before maturity date, that is exercising the conversion option Ct or waiting a further period C, ... 

Convertible instruments are usually issued with attached call or put options. Such features can be implemented into the valuation model. If a soft call feature has been implemented, it enables the issuer to force the conversion when the share price overcomes a percentage or trigger level above the conversion price. However, this option cannot be called in the first years hard call . Differently, after the protection period, the issuer can exercise the option. This second time is referred to soft call . Using the same example shown in Section 9.3.1, we assume that the bond may be redeemed in whole but not in part at their principal amount plus accrued interest on the last 2 years, in which the maturity date is at 20 February 2019. On and after this call date , if the share price exceeds 130% of the conversion price the issuer can force the conversion. Figure 9.23 shows the stock price tree in which at years 4 and 5 the stock price is above the threshold. 

Bonds with embedded options are instruments that give the option holder the right to redeem the bond before its maturity date. For callable bonds, this right is held by the issuer. The main reason for an issuer to issue these debt instruments is to get protection from the decline of interest rates or improvement of issuer s credit quahty. In other words, if interest rates fall or credit quality enhances, the issuer has convenience to retire the bond from the market in order to issue again another bond with lower interest rates. 

Yield to maturity This measure assumes that the bond is not called until the maturity date. Therefore, it is calculated as the yield of a straight bond ... 

A bond is therefore a financial contract from the person or body that has issued the bond, that is, the borrowed funds. Unlike shares or equity capital, bonds carry no ownership privileges. The bond remains an interest-bearing obligation of the issuer until it is repaid, which is usually on its maturity date. 

Some bonds include a provision in their offer particulars that gives either the bondholder and/or the issuer an option to enforce early redemption of the bond. The most common type of option embedded in a bond is a call feature. A call provision grants the issuer the right to redeem all or part of the debt before the specified maturity date. An issuing company may wish to include such a feature as it allows it to replace an old bond issue with a lower coupon rate issue if interest rates in the market have declined. As a call feature allows the issuer to change the maturity date of a bond it is considered harmful to the bondholder s interests therefore the market price of the bond at any time will reflect this. A call option is included in all asset-backed securities based on mortgages, for obvious reasons. 

As noted, a bond may contain an embedded option which permits the issuer to call or retire all or part of the issue before the maturity date. The bondholder, in effect, is the writer of the call option. From the bondholder s perspective, there are three disadvantages of the embedded call option. First, relative to bond that is option-free, the call option introduces uncertainty into the cash flow pattern. Second, since the issuer is more likely to call the bond when interest rates have fallen, if the bond is called, then the bondholder must reinvest the proceeds received at the lower interest rates. Third, a callable bond s upside potential is reduced because the bond price will not rise above the price at which the issuer can call the bond. Collectively, these three disadvantages are referred to as call risk. MBS and ABS that are securitized by loans where the borrower has the option to prepay are exposed to similar risks. This is called prepayment risk, which is discussed in Chapter 11. 

Cash flow is simply the cash that is expected to be received in the future from owning a financial asset. For a fixed-income security, it does not matter whether the cash flow is interest income or repayment of principal. A security s cash flows represent the sum of each period s expected cash flow. Even if we disregard default, the cash flows for some fixed-income securities are simple to forecast accurately. Noncallable benchmark government securities possess this feature since they have known cash flows. For benchmark government securities, the cash flows consist of the coupon interest payments every year up to and including the maturity date and the principal repayment at the maturity date. 

To illustrate the process, let s value a 4-year, 6% coupon bond with a maturity value of 100. The coupon payments are 6 for the next four years. In addition, on the maturity date, the investor receives the repayment of principal ( 100). The value of a nonamortizing bond can be divided in two components (1) the present value of the coupon payments (i.e., an annuity) and (2) the present value of the maturity value (i.e., a lump sum). Therefore, when a single discount rate is employed, a bond s value can be thought of as the sum of two presents values—an annuity and a lump sum. 

As a bond moves towards its maturity date, its value changes. More specifically, assuming that the discount rate does not change, a bond s value ... 

At the maturity date, the bond s value is equal to its par or maturity value. So, as a bond s maturity approaches, the price of a discount bond will rise to its par value and a premium bond will fall to its par value— a characteristic sometimes referred to as pull to par value. ... 

The gilts market is primarily a plain vanilla market, and the majority of gilt issues are conventional fixed interest bonds. Conventional gilts have a fixed coupon and maturity date. By volume they made up 82% of the market in June 2002. Coupon is paid on a semi-annual basis. The coupon rate is set in line with market interest rates at the time of issue, so the range of coupons in existence reflects the fluctuations in market interest rates. Unlike many government and corporate bond markets, gilts can be traded in the smallest unit of currency and sometimes nominal amounts change hands in amounts quoted down to one penny ( 0.01) nominal size. 

A repo that does not have a specified fixed maturity date is known as an open repo. In an open repo the borrower of cash will confirm each morning that the repo is required for a further overnight term. The interest rate is also fixed at this point. If the borrower no longer requires the cash, or requires the return of his collateral, the trade will be terminated at one day s notice. 

A repo-to-maturity is a classic repo where the termination date on the repo matches the maturity date of the bond in the repo. We can discuss this trade by considering the Bloomberg screen used to analyse repo-to-maturity, which is REM. The screen used to analyse a reverse repo-to-maturity is RRM. 

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