Mispricing
What is Mispricing? Mispricing causes a divergence between the market price of a security and the fundamental value of that security. The law of one price states that the market price of a security is equal to the present discounted value of all cash flows generated by the security. However, it is not always the...
Hybrid Securities
What are Hybrid Securities? Hybrid securities are investment instruments that combine the features of pure equities and pure bonds. These securities tend to offer a higher return than pure fixed income securities such as bonds but a lower return than pure variable income securities such as equities. They are considered less riskier than pure variable...
Fairly Valued Security
What is a Fairly Valued Security? A security is said to be fairly valued if its market price is equal to its true value. Since the true value of a security is usually not known, the question of whether a security is fairly valued lacks a definite answer. Most securities are valued using some variation...
Local Expectations Theory
What is the Local Expectations Theory? In finance and economics, the Local Expectations Theory is a theory that suggests that the returns of bonds with different maturities should be the same over the short-term investment horizon. Essentially, the local expectations theory is one of the variations of the pure expectations theory, which assumes that the...
Swaption
What is a Swaption? A swaption (also known as a swap option) is an option contract that grants its holder the right but not the obligation to enter into a predetermined swap contract. In return for the right, the holder of the swaption must pay a premium to the issuer of the contract. Swaptions typically...
