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The simplest way to understand this is to write out the numbers for a particular loan. You can track the balance, and interest over time. Very easily done in a spreadsheet. The amount of principal repaid in each payment is increasing as time passes, as the amount of interest paid falls (since the interest is proportional to a falling principal balance).


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Typically junk bonds, given their speculative grade, are undervalued as people avoid them. Therefore the spread over treasuries is more than the risk of default, by buying junk bonds and selling treasuries, to hedge interest rate risk. Often profits can be achieved by buying junk bonds and selling treasuries, unless the junk bond defaults. Wikipedia ...


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You assumed that junk bonds do not default. They do default. So people will price junk bonds at a greater yield than Treasuries. It can’t be arbitraged since the probability of default (and associated loss) is unknown. An arbitrage implies locking in an abnormal profit at no risk. You cannot hedge out that default risk without using an instrument like a ...


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I also agree that method 3 is the best option. Just as the previous posted stated. You must chose the base year then use that value to adjust the time series, assuming this time series is annual. For 2008 the value would be 100 then 2009 would be 1.03 and 2010 would be 1.04. $100 * (1.03) * (1.04) = 107.12


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Thanks for the posting. The greatest problem with those instruments was nonredemption. Now that is solved through blockchain rewarding mechanism with the smart contracts. You can check with Marmara Credit Loops. https://www.youtube.com/watch?v=hQYgDhSsHrI


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(Looking at the question and notation used more closely, the formulation seems to be problematic in couple places.) General Fact Let $W$ be standard Brownian motion with respect to filtration $( \mathscr F_t )_{t \in [0,T]}$. Consider $(L_t)_{t \in [0,T]}$ defined by $$ \frac{dL_t}{L_t} = \psi_t dL_t, \; L_0 = 1. $$ In general, $L_t = e^{\int_0^t \psi_s ...


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A great starting point is "Fundamentals of Corporate Finance", Ross, Westerfield & Jordan. This book will give you a good overview of key concepts in finance. This book is widely used in introductory courses for non-finance majors, to both teach some fundamental ideas, and give a panoramic view of the field. "Trading" will probably be the topic that ...


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Net Present Value (NPV) as a soft concept existed probably even in antiquity but it was formalized and made popular by Irving Fisher in his book the Rate of Interest. Internal rate of return is basically a special application of NPV. It was also first formally introduced in Fisher's book although he called it 'rate of return over costs'. Duration of bonds ...


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Your misunderstanding comes from the fact you are treating a penny stock as an option. They are not the same this is just a metaphor. The difference that makes the difference here is ownership. The reason the strike price would theoretically be zero is, for a penny stock you own the underlying asset, so you would not pay to own something you already own. ...


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