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
At the end of 1922, your great grandfather (g.g.f.) established a trust fund to be used in order to help a later generation of the family obtain a university education. The ultimat

One of the most important objectives of statistical analysis is to get one single value that describes the characteristic of the entire mass of unwieldy

Joe and Sam each invested $20,000 in the stock market. Joe's investment increased in value by 5% per year for 10 years. Sam's investment decreased in value by 5% for 5 years and th

364-Day T-Bills The Government considered that it is important to develop government securities market for monetary control. It also had an intention to ensure that government'

Balance Sheets   Peony Ltd. Aster Ltd. Assets:     Cash $     62,500 $

Q. Explain what is Comprehensive Income? Comprehensive Income - Change in EQUITY of a business enterprise during a period from transactions and other circumstances and events f

Insider Trading Insider trading refers to dealing in securities by persons who are privy to specific information of companies. This possession of confidential information gives

#what are the main points in scope or contents of financial functions#

ABC Ltd. Produces electronic components with a selling price per of Rs.100. Fixed cost amount to Rs.2,00,000/- 5000 units are produced and sold each year. Annua

Q. Describe Modigliani and Miller Approach of Capital Structure? Ans. Modigliani as well Miller Approach: - The Modigliani-Miller approach is alike to the net operating income