Financial instruments are commonly traded in financial and securities markets. The buying and the selling of such commodities is done in accordance to the market regulations. There is a need to value the face value of the commodities being traded before a trade can take place. In most cases, the price is determined by the demand and the supply of the various securities. High demand pushes the process high while an increase in the supplies reduces the prices. A price for bond is determined by the interplay of the market forces.
The valuation of the bonds being traded in the market of other securities is done after the cash flows have been taken into consideration. In practice, the face value of the bonds in trading is often the present value of the future cash flows. All the relevant costs have to be deducted from the value of the cash flows. This is done using an appropriate discount factor.
There are different classes of bonds that are often traded in various markets. Some of them have embedded options while others do not. If bonds are embedded, a specific yield rate for each of options has to be taken into consideration. Where the values for the yields are unavailable, a general rate can be used in calculation of the present values.
Before the pricing of a financial instrument, several pieces of data have to be collected. The discount rates to be used have to be calculated depending on the general performance of markets. The yield rates and rate of returns also have to be calculated. Where such information is hard to acquire, the bonds are relatively priced. This means that their prices are determined using a benchmark. In most cases, the corporate and the government securities are used for arriving at their prices.
Traders have an option of segregating the different cash flows expected from their investments. This means that they treat them as special packages. In some markets, the cash flows are treated as zero-rated coupons. Each coupon has a different rate of return. The costs may be netted off against the expected returns. The use of separate rates of returns means that the traders have an option of bundling the cash flows.
There are a couple of risks that affects the rates of investment and the return from bonds. The risks are mainly categorized into finance and business related. The finance risks are often associated with the level of risks in each security. Business risks are associated with specific lines of businesses.
Modeling is usually done to estimate the future prices of various securities. This puts the risks and the uncertainties into consideration. The interest rates and the rate of returns are plugged into the models in question to help estimate the likely future prices.
Accuracy in estimation of prices is very important. This reduces the chances of caring the errors forward. It also ensures that the traders are feed with the right information. This is good for the market as the investment decisions are made using accurate data reducing the losses likely to be made.
The valuation of the bonds being traded in the market of other securities is done after the cash flows have been taken into consideration. In practice, the face value of the bonds in trading is often the present value of the future cash flows. All the relevant costs have to be deducted from the value of the cash flows. This is done using an appropriate discount factor.
There are different classes of bonds that are often traded in various markets. Some of them have embedded options while others do not. If bonds are embedded, a specific yield rate for each of options has to be taken into consideration. Where the values for the yields are unavailable, a general rate can be used in calculation of the present values.
Before the pricing of a financial instrument, several pieces of data have to be collected. The discount rates to be used have to be calculated depending on the general performance of markets. The yield rates and rate of returns also have to be calculated. Where such information is hard to acquire, the bonds are relatively priced. This means that their prices are determined using a benchmark. In most cases, the corporate and the government securities are used for arriving at their prices.
Traders have an option of segregating the different cash flows expected from their investments. This means that they treat them as special packages. In some markets, the cash flows are treated as zero-rated coupons. Each coupon has a different rate of return. The costs may be netted off against the expected returns. The use of separate rates of returns means that the traders have an option of bundling the cash flows.
There are a couple of risks that affects the rates of investment and the return from bonds. The risks are mainly categorized into finance and business related. The finance risks are often associated with the level of risks in each security. Business risks are associated with specific lines of businesses.
Modeling is usually done to estimate the future prices of various securities. This puts the risks and the uncertainties into consideration. The interest rates and the rate of returns are plugged into the models in question to help estimate the likely future prices.
Accuracy in estimation of prices is very important. This reduces the chances of caring the errors forward. It also ensures that the traders are feed with the right information. This is good for the market as the investment decisions are made using accurate data reducing the losses likely to be made.
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