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

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.