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Coupon Stripping-7.16 Key Components: Give the cash flows or payments on corresponding date or year (you needn’t discount the cash flows). Coupon Stripping is a process to unbundle the cash flows (coupons) from Coupon Bond (coupon stripping is used to create a series of Pure Discount Bonds). 7.16.b--Solutions: subtracting 0.93*70 from 985.30, you can obtain the break-even price of Treasury Strip. Key Components: The effect of callable, convertible, ‘put back’ and tax-exempt on the market price of bonds. The callable bond would have a lower price than the non-callable bond to compensate the bondholders for granting the issuer the right to call the bonds. The convertible bond would have a higher price because it gives the bondholders the right to convert their bonds into shares of stock. The puttable bond would have a higher price because it gives the bondholders the right to sell their bonds back to the issuer at par. The bond with the tax-exempt coupon has a higher price because the bondholder is exempted from paying taxes on the coupons. (Coupons are usually considered and taxed as personal income). Chapter 9: Principles of Risk Management Chapter 9 Contents What is Risk? Risk and Economic Decisions The Risk Management Process The Three Dimensions of Risk Transfer Risk Transfer and Economic Efficiency Institutions for Risk Management Portfolio Theory: Quantitative Analysis for Optimal Risk Management Probability Distributions of Returns Standard Deviation as a Measure of Risk Roles of Risk Management One of the three analytical “pillars” to finance The time value of time Asset Valuation Risk Management Risk allocation (redistribution) : a fundamental function of the financial system. Concept of Risk Uncertainty and risk Uncertainty: one does not know for sure what will occur in the future. Risk: uncertainty that matters or uncertainty with losses Illustration: preparing foods for party Risk Aversion Risk Aversion: Prefer lower risk given same expected value A c
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