Nature and Pricing of Security

In calculating and understanding the nature and pricing of securities such as notes, bonds or other securities with fixed incomes, coupon payment is not synonymous to coupon rate; however the latter means the same as a coupon yield. Justification A security coupon rate , also referred to as the nominal rate, for example a bond coupon, is the annually paid interest amount paid by the issuer of the security to the holder of the security. Coupon rate is usually expressed as a face value percentage of the bond. This interest is determined by a number of factors such as the issuer’s creditworthiness and the interest rate that is prevailing.

The nominal yield, under normal circumstance, is paid twice a year. Furthermore, current interest rates can be realized and these differ from the nominal rates (Brown, 2010). On the other hand, coupon payment refers to the lender’s remuneration and it is regularly paid throughout the security’s life. It is simply the security’s interest payments. Coupon payment, also known as the nominal amount, is obtained by multiplying the principal amount of the security with the coupon rate. The issuer of the bond has the mandate to specify the terms that are there for the issued bond or any other income fixed security.

For instance, whether the coupon rate is to be paid in one coupon payment or the entire coupon rate will be distributed throughout the year in multiple coupon payments (Mysmp. com, 2010). The present value (PV) of a security such as a bond assumes that each coupon payment once received is re-invested at some rate of interest. In calculating a security’s price, prior determinations must be made on the number of coupon payments, value of each coupon and the coupon rate. Performance Ratios and Profit Determination Opinion

For banks to expand their profits and loan base, they ought to lower the rates of interest that they charge on the loans and also relax their credit requirements. This will ensure more lending by these financial institutions thus spreading out their loan bases since profit making is not their sole pursuit. Justification Lowering and maintaining the interests that banks charge on their loans get the banks to be in a position to lend time and again. This not only leads to a measurable expansion in the bank’s loan base but also sees institutions’ the realization of almost 2. 5 % risk-free profits.

As a result the bank, in addition to having made profits, will be in a position to recapitalize its systems (Edwards, 1996). In lending the money, these banks are involved in creating the money. Besides, the banks are left with small percentages of the new amount in their reserves since most of the rest is lend to a different party. This propels the continual process of money creation. Relaxing or reducing the credits requirements by a bank plays a vital role of attracting more customers to the bank.

Consequently, the bank might find itself being more profitable. In addition, this practice will break the monopoly that has been prevailing of only the wealth concentrating the market for loans (Spaulding, 2008). Due to this diversity, the bank’s loan base will also have expanded proportionately. Since neither an increase in the loans’ interest rates nor the strictness of the credit requirements increases the profitability of the financial institution, equilibrium has to be resulted at to maintain the normal profits of the bank and also ensure continuity of lending.