Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Cash flow duration, like effective duration, considers the change in the cash flow due to prepayment with the change in the interest rate. In effective duration, cash flows are calculated using the Monte Carlo method, but in cash flow duration the cash flows are calculate using static methodology. Following are the steps followed to calculate cash flow duration:
Cash flows are calculated based on some prepayment assumptions.
Using the calculated cash flows and the market price (P0), the cash flow yield is computed.
Cash flow yield is then increased by Δ y and the new prepayment rate at that higher cash flow yield is determined from a prepayment model. The prepayment rate would be lower because of the higher yield.
Using this lower prepayment rate, we can arrive at cash flow and the value of the cash flow using the higher cash flow yield as the discount rate (P+).
Similarly, cash flow yield is decreased by Δy and the new payment rate at lower cash flow yield is calculated. Then, using this higher prepayment rate, cash flow and the value of the cash flow using the lower cash flow yield as the discount (P-) is calculated.
Once we calculate P+ and P-, we can calculate the duration using the general formula of duration i.e.,
Duration =
When we compare modified duration, effective duration and cash flow duration, modified duration is considered inferior to that of cash flow duration. This is because modified duration ignores the changes in prepayment due to interest rate changes. Cash flow yield is based on naïve assumption about how prepayments may change; in contrast, Monte Carlo simulation model is based on more sophisticated analyses of how the cash flow can change when interest rates change. The effective duration computed using Monte Carlo method is considered superior to cash flow duration.
What is meant by deadweight loss? Why does a price ceiling usually result in a deadweight loss? Deadweight loss considers to the benefits lost to either consumers or producers
Working and function of stock exchange
Treasury Bills, popularly known as T-bills, are issued in India by the RBI on behalf of the Government of India. T-bills are short-term securities with a maturity of 91
Assume that your company has an equity position in a French firm. Explain the condition under which the dollar/franc exchange rate uncertainty does not comprise exchange exposure f
Every business concern should have neigh adequate capital to run the business operations it should have neither redundant nor excess working capital non inadequate or Shortage of
a) B2C businesses provide goods and services to the general public, i.e. consumers. HMV sell music, books and DVDs (via Waterstones) to private individuals and can therefore be cla
State the impact on profitability of the company Everything you do has an impact on profitability of the company(including drinking ten cups of coffee in a day!). So if you wan
Q. Explain demerits of accept-reject criteria? Demerits of ARR:- (i) It utilizes accounting income rather than cash flows: - The principal short coming of ARR schema is th
Q. Explain about Pay Back Method? Pay Back Method (PB) :- The payback process is the simplest method. This method computed the number of years required to pay back the original
what are the arguments in favour of profit maximization?
Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd