Question

Describe with illustrations, various theories of valuation of fixed income and variable income securities.

Answer 1

Valuation of fixed income security can be illustrated in the following ways :-

1) In government based companies,

the workers gets a constant salary

amount.

2) Small merchants gets nearly a

constant salary income based on

their business.

Valuation of variable income security can be illustrated in the following way :-

1) Private company employees get

variable income according to their

business profits.

2) Big and rich merchants take higher

risk by betting more on his

business and therefore get

variable income.

Answer 2

A fixed income security is an investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity.

Unlike a variable-income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance. This is how the fixed income security is depicted.