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.
Market risk as that portion of total variability of return caused by the alternating Forces of bull and bear markets. When the security index moves upward haltingly for a signifi
I am looking for assignment help on the topic Structure and Organization of Treasury. It would be great if anyone help me.
Question 1: (a) Discuss the main limitations of using changes in national income as an index of economic welfare. (b) What are the alternatives measures and issues that sho
Before tax cost of debt and after tax cost of debt; Personal finance problem. David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following inform
In how many area ratios are grouped Ratios can be grouped into 3 main areas: 1 Performance - how well business has done (profitability) 2 Position - short term standing
Which type of insurance company generally takes on the greater risks: a life insurance company or a property and casualty insurance company? The risks protected in opposition to
Primary Market In an economy, at a given point of time, there will be people/entities called savers the surplus units, whose current income exceeds their current expenditure whi
Revenues Revenues are the gross income received before any deductions for discounts, expenses, returns, and so on. It is also called sales in most organization. A much less c
Peak Inc. needs to order Canadian raw materials to use in its production process. The Canadian exporter typically invoices Peak in Canadian dollars. Assume that the current exchang
Parallel T rade It is a form of countertrade that involves the execution of 2 distinct and individually enforceable contracts: the first for the sale of goods by an exp
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