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The cocktail problem: the relationship between composite yield and component yields

Published online by Cambridge University Press:  20 April 2012

John Rickard ,
Allen Russell  and
Brett Collins
John Rickard
Affiliation:
University of Melbourne
Allen Russell
Affiliation:
University of Melbourne
Brett Collins
Affiliation:
University of Melbourne
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Abstract

When two or more independent or component loans are consolidated to form a single composite loan the result is often referred to as a cocktail loan. In this paper we analyse properties of a composite loan induced by properties of the component loans. Of particular interest are the properties of the composite yield in terms of the yields and other characteristics of the component loans. Some upper and lower bounds are also established for the composite yield in terms of the component yields. Of some importance is a sensitivity analysis of the composite yield with respect to various parameters of the component loans.

Type
Research Article
Information
Journal of the Institute of Actuaries , Volume 115 , Issue 2 , June 1988 , pp. 317 - 332
Copyright
Copyright © Institute and Faculty of Actuaries 1988

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References

Hathaway, N. (1986) A note on ‘cocktail’ loan rates. Graduate School of Management Working Paper No. 18, University of Melbourne.Google Scholar
Hardy, G. H., Littlewood, J. E. & Polya, G. (1964) Inequalities. Cambridge University Press.Google Scholar