Cash flow yield analysis, Financial Management

Assignment Help:

A cash-flow yield is the discount rate that makes the price of a mortgage-backed or asset-backed security equal to the present value of its cash flows. It is equivalent to the yield to maturity measure. In mortgage-backed and asset-backed securities, because of prepayments, the cash flow is unknown; so some assumption about the prepayment rate must be made to calculate the cash-flow yield.

Different from a normal bond, which typically pays a coupon semi-annually, a mortgage-backed or asset-backed security makes monthly payments. Therefore, the investor has the opportunity to generate greater reinvestment income by reinvesting the monthly cash flows. In a treasury coupon security, bond-equivalent yield can be found out by doubling the semi-annual yield, but because of more frequent payments the same concept cannot be used in calculating the
bond-equivalent yield for mortgage-backed and asset-backed securities. The market convention is to calculate a yield so as to make it comparable to the yield to maturity on a bond-equivalent basis. The formula for annualizing the monthly cash flow yield for a monthly pay product is as follows:

         Bond-equivalent yield = 2 [(1 + iM)6 - 1]

Where, iM is the monthly interest rate that will equate the present value of the projected monthly cash flow equal to the market price (plus accrued interest) of the security.

Example: If the monthly cash flow yield is 0.8%, then the bond equivalent yield is  

2 x [(1.008)6 - 1] = 0.0979 = 9.79%.


Related Discussions:- Cash flow yield analysis

Market capitalization, Market Capitalization : Often referred to as marke...

Market Capitalization : Often referred to as market cap, it refers to the value of a company, that is, the market worth of its outstanding shares. A common misconception is that

Time Value of Money, Two years ago, Randburg Ltd needed to accumulate a tot...

Two years ago, Randburg Ltd needed to accumulate a total of R250000 by the end of 5 years to acquire new imported machinery. To do so Randburg Ltd makes quarterly-annual deposits i

Investment appraisal , what are the limitations of using projected data

what are the limitations of using projected data

Credit enhancement of asset-backed security, Credit enhancement of an...

Credit enhancement of an asset-backed security implies the existence of support for one or more of the bondholders in the structure. Credit enhancement levels var

Examine the concepts related to financial management, Assume you are a prof...

Assume you are a professional financial analyst working for a wealthy investor.  Your client has $2.6 million to invest and wants to sink it into a single stock (diversification is

What is capital recovery, Q. What is Capital recovery? sometimes one ma...

Q. What is Capital recovery? sometimes one may be interested to find out the annual amount paid in the order to redeem a loan of a specific amount over a specific period togeth

Asset Securitization Structures (Excel help), #questAs an assistant vice pr...

#questAs an assistant vice president at a regional bank, your boss has tasked you to acquire $100 million of residential mortgages to be securitized in a pass-through MBS. There mu

What do you mean by cash flow ratios, Q. What do you mean by Cash Flow Rati...

Q. What do you mean by Cash Flow Ratios? Cash Flow Ratios: - Cash Flow Ratios are an additional device of cash management. Some important cash flow ratios are: (i) Cash Turn

Domestic factors were important than international factor, Why do you think...

Why do you think the empirical studies as regards factors influencing equity returns mainly showed that domestic factors were more significant than international factors, and, seco

Financial derivatives, Do you provide plaigerism free solutions to question...

Do you provide plaigerism free solutions to questions or do you only tutor?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

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!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd