Rate changes and duration estimate, Financial Management

To calculate duration, we need to first obtain the values for V- and V+ where V- is the price when the yield decreases by certain number of basis points and V+ is the price when the yield increases by same number of basis points. However, the question is how much should be used to shock the interest rates up and down. While calculating duration estimates for option-free bonds the size of shock is not important. But when we deal with complex securities, like bonds with embedded options, even small rate change may change the expected cash flows and as a result determining the price change may not be possible. In case of large rate shocks, it may cause dramatic changes in the expected cash flows. Another draw back of using small changes in interest rate.  The prices used for calculations are based on valuation model. If the valuation model  used is poor, the prices calculated using that valuation model would also be a poor price estimate. When such estimates are divided by small shock in the rates in the denominator, there would be a significant effect on the duration estimate.

Posted Date: 9/10/2012 5:13:39 AM | Location : United States







Related Discussions:- Rate changes and duration estimate, Assignment Help, Ask Question on Rate changes and duration estimate, Get Answer, Expert's Help, Rate changes and duration estimate Discussions

Write discussion on Rate changes and duration estimate
Your posts are moderated
Related Questions
The following information pertains to Fairways Driving Range, Inc.: The company is considering operating a new driving range facility in Sanford, FL. In order to do so, they wi

Best practice or functional benchmarking Compare an internal function to 'the best' however not necessarily an organisation in same industry for example compare administrati

Taxation In the US, every state has a different set of rules governing the taxation of Hedge Funds and the investors who put their money in them. In some countries, Hedge Funds

Q. Explain about Current Value? Current Value - (1) Value of an ASSET at present time as compared with asset's HISTORICAL COST. (2) In finance, amount determined by discounting


Question: You have just been appointed the secretary of the ALM Committee (ALCO) of ABN Bank. The ALCO members have some queries relating to the liquidity risk faced by the ban

QUESTION (a) A financial fraud has happened in BABA Bank. Your services have been retained as forensic examiner to investigate the above case While investigating you receive

how to write a vegetation operating cycle

Discounted Pay Back Period (DPBP) : The discounted payback period is the number of periods taken in recovering the investment outlay on the present value basis.  Discounted pa

Suppose today's settlement price on a CME DM futures contract is $0.6080/DM. You comprise a short position in one contract. Your margin account at present has a balance of $1,700.