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Immunization (finance)
In finance, interest rate immunization is a portfolio management strategy designed to take advantage of the offsetting effects of interest rate risk and reinvestment risk. In theory, immunization can be used to ensure that the value of a portfolio of assets (typically bonds or other fixed income securities) will increase or decrease by the same amount as a designated set of liabilities, thus leaving the equity component of capital unchanged, regardless of changes in the interest rate. It has found applications in financial management of pension funds, insurance companies, banks and savings and loan associations. Immunization can be accomplished by several methods, including cash flow matching, duration matching, and volatility and convexity matching. It can also be accomplished by trading in bond forwards, futures, or options. Other types of financial risks, such as foreign exchange risk or stock market risk, can be immunised using similar strategies. If the immunizati ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Finance
Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Administration wich study the planning, organizing, leading, and controlling of an organization's resources to achieve its goals. Based on the scope of financial activities in financial systems, the discipline can be divided into Personal finance, personal, Corporate finance, corporate, and public finance. In these financial systems, assets are bought, sold, or traded as financial instruments, such as Currency, currencies, loans, Bond (finance), bonds, Share (finance), shares, stocks, Option (finance), options, Futures contract, futures, etc. Assets can also be banked, Investment, invested, and Insurance, insured to maximize value and minimize loss. In practice, Financial risk, risks are always present in any financial action and entities. Due ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Bond (finance)
In finance, a bond is a type of Security (finance), security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to provide cash flow to the creditor (e.g. repay the principal (i.e. amount borrowed) of the bond at the Maturity (finance), maturity date and interest (called the coupon (bond), coupon) over a specified amount of time.) The timing and the amount of cash flow provided varies, depending on the economic value that is emphasized upon, thus giving rise to different types of bonds. The interest is usually payable at fixed intervals: semiannual, annual, and less often at other periods. Thus, a bond is a form of loan or IOU. Bonds provide the borrower with external funds to finance long-term investments or, in the case of government bonds, to finance current expenditure. Bonds and Share capital, stocks are both Security (finance), securities, but the major difference between the two is that (capital) stockholders h ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Interest Rate Parity
Interest rate parity is a no-arbitrage condition representing an equilibrium state under which investors compare interest rates available on bank deposits in two countries. The fact that this condition does not always hold allows for potential opportunities to earn riskless profits from covered interest arbitrage. Two assumptions central to interest rate parity are capital mobility and perfect substitutability of domestic and foreign assets. Given foreign exchange market equilibrium, the interest rate parity condition implies that the expected return on domestic assets will equal the exchange rate-adjusted expected return on foreign currency assets. Investors then cannot earn arbitrage profits by borrowing in a country with a lower interest rate, exchanging for foreign currency, and investing in a foreign country with a higher interest rate, due to gains or losses from exchanging back to their domestic currency at maturity. Interest rate parity takes on two distinctive forms: ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Duration Gap
In Finance, and accounting, and particularly in asset and liability management (ALM), the duration gap measures how well matched are the timings of Cash flow, cash inflows (from assets) and cash outflows (from liabilities), and is then one of the primary asset–liability mismatches considered in the ALM process. The term is typically used by banks, pension funds, or other financial institutions to measure, and manage, their risk due to changes in the interest rate: by duration matching, that is creating a "zero duration gap", the firm becomes immunization (finance), immunized against interest rate risk. See . Frederic S. Mishkin and Apostolos Serletis (2004)Duration Gap Analysis Staff (2020)Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques analystprep.com Measurement Formally, the duration gap is the difference between the Bond duration, duration - i.e. the Bond_duration#Modified_duration, average ''maturity'' - of assets and liab ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Debt Sculpting
A project finance model is a specialized financial model, the purpose of which is to assess the economic feasibility of the project in question. The model's output can also be used in structuring, or "sculpting", the project finance deal. Context Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project - rather than the balance sheets of its sponsors. The project is therefore only feasible when the project is capable of producing enough cash to cover all operating and debt-servicing expenses over the whole tenor of the debt. Most importantly, therefore, the model is used to determine the maximum amount of debt the project company (Special-purpose entity) can maintain - and the corresponding debt repayment profile; there are several related metrics here, the most important of which is arguably the Debt Service Coverage Ratio (DSCR) - the financial metric that measures the ability of a project to gen ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Asset–liability Mismatch
In finance, an asset–liability mismatch occurs when the financial terms of an institution's assets and liabilities do not correspond. Several types of mismatches are possible. An asset-liability mismatch presents a material risk at institutions with significant debt exposure, such as banks or sovereign governments. A significant mismatch may lead to insolvency or illiquidity, which can cause financial failure. Such risks were among the principal causes of economic crises such as the 1980s Latin American Debt Crisis, the 2007 Subprime Mortgage Crisis, the U.S. Savings and Loan Crisis, and the collapse of Silicon Valley Bank in 2023. Currency mismatch For example, a bank that borrows funds in U.S. dollars and lends in Russian rubles would have a significant currency mismatch: if the value of the ruble were to fall relative to the dollar, then the bank would incur a financial loss. In extreme cases, such changes in the value of the assets and liabilities could lead to bankru ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Yield Curve
In finance, the yield curve is a graph which depicts how the Yield to maturity, yields on debt instruments – such as bonds – vary as a function of their years remaining to Maturity (finance), maturity. Typically, the graph's horizontal or x-axis is a time line of months or years remaining to maturity, with the shortest maturity on the left and progressively longer time periods on the right. The vertical or y-axis depicts the annualized yield to maturity. Those who issue and trade in forms of debt, such as loans and bonds, use yield curves to determine their value. Shifts in the shape and slope of the yield curve are thought to be related to investor expectations for the economy and interest rates. Ronald Melicher and Merle Welshans have identified several characteristics of a properly constructed yield curve. It should be based on a set of securities which have differing lengths of time to maturity, and all yields should be calculated as of the same point in time. Al ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Principal Component Analysis
Principal component analysis (PCA) is a linear dimensionality reduction technique with applications in exploratory data analysis, visualization and data preprocessing. The data is linearly transformed onto a new coordinate system such that the directions (principal components) capturing the largest variation in the data can be easily identified. The principal components of a collection of points in a real coordinate space are a sequence of p unit vectors, where the i-th vector is the direction of a line that best fits the data while being orthogonal to the first i-1 vectors. Here, a best-fitting line is defined as one that minimizes the average squared perpendicular distance from the points to the line. These directions (i.e., principal components) constitute an orthonormal basis in which different individual dimensions of the data are linearly uncorrelated. Many studies use the first two principal components in order to plot the data in two dimensions and to visually identi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Term Structure Of Interest Rates
In finance, the yield curve is a graph which depicts how the yields on debt instruments – such as bonds – vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or years remaining to maturity, with the shortest maturity on the left and progressively longer time periods on the right. The vertical or y-axis depicts the annualized yield to maturity. Those who issue and trade in forms of debt, such as loans and bonds, use yield curves to determine their value. Shifts in the shape and slope of the yield curve are thought to be related to investor expectations for the economy and interest rates. Ronald Melicher and Merle Welshans have identified several characteristics of a properly constructed yield curve. It should be based on a set of securities which have differing lengths of time to maturity, and all yields should be calculated as of the same point in time. All securities measured in the yield cu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Macaulay Duration
In finance, the duration of a financial asset that consists of fixed cash flows, such as a bond, is the weighted average of the times until those fixed cash flows are received. When the price of an asset is considered as a function of yield, duration also measures the price sensitivity to yield, the rate of change of price with respect to yield, or the percentage change in price for a parallel shift in yields. The dual use of the word "duration", as both the weighted average time until repayment and as the percentage change in price, often causes confusion. Strictly speaking, Macaulay duration is the name given to the weighted average time until cash flows are received and is measured in years. Modified duration is the name given to the price sensitivity. It is (-1) times the rate of change in the price of a bond as a function of the change in its yield. Both measures are termed "duration" and have the same (or close to the same) numerical value, but it is important to keep in ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Frank Fabozzi
Frank J. Fabozzi is an American economist, educator, writer, and investor, currently Professor of Practice at The Johns Hopkins University Carey Business School and a Member of Edhec Risk Institute. He was previously a professor of finance at EDHEC Business School, Professor in the Practice of Finance and Becton Fellow in the Yale School of Management, and a visiting professor of finance at the Sloan School of Management at the Massachusetts Institute of Technology. He has authored and edited many books, three of which were coauthored with Nobel laureates, Franco Modigliani and Harry Markowitz. He has been the editor of the '' Journal of Portfolio Management'' since 1986 and is on the board of directors of the BlackRock complex of closed-end funds. Early life and education He earned a BA (magna cum laude) and a Master of Economics from the City College of New York, both in 1970. He also earned a doctorate in economics from the Graduate Center of the City University of New ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Guaranteed Investment Contract
A guaranteed investment contract (GIC) is a contract that guarantees repayment of principal and a fixed or floating interest rate for a predetermined period of time. Guaranteed investment contracts are typically issued by life insurance companies qualified for favorable tax status under the Internal Revenue Code (for example, 401(k) plans). A GIC is used primarily as a vehicle that yields a higher return than a savings account or United States Treasury securities and GICs are often used as investments for stable value funds. GICs are sometimes referred to as funding agreements, although this term is often reserved for contracts sold to non-qualified institutions. Example: Funds obtained through a municipal bond issuance will generally take time to be drawn down. Depositing the bond proceeds in a GIC gives the bond issuer the liquidity of having the funds available while earning a higher rate of return than it would earn in a money market account. GICs are considered safe vehicl ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
