6.20.2005

Q&A: When estimating bond cash flows, what are...

...some of the more common issues that makes it tricky?

CppQuant Answer

  • Embedded options: cause uncertainty timing of principal repayment. such as callable bonds, putable bonds, asset-backed securities, and mortgage-backed securities.
  • Variable coupon rates: cause uncertain amount of coupon payments. For example, coupon rates of floating-rate securities are periodically reset based on some benchmark rates.
  • Conversion or exchange privileges cause uncertain amount and timing of cash flows. Examples are convertible bonds and exchangeable bonds.

Category: Debt > Valuation

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