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!
Effective Duration and Convexity
The modified duration is a measure of the sensitivity of a bond's price to interest rate changes; the assumption made here is that the expected cash flow does not change with the interest rates. In the case of a callable bond, the cash flow does change with the interest rates. Then modified duration may not be appropriate to measure the price volatility of such bonds. If the rate of interest falls, the expected cash flow for a callable bond may change. Thus it may be concluded that modified duration is not an appropriate measure of price sensitivity to interest rate changes.
If P0 is the initial price and P1 is the price level to which it is reduced on account of a small increase in the yield (Dy) and the price increases to a level of P2 on account of a small decrease in the yield (Dy) then the approximate duration is given by the formula, Approximate duration =
where y is used in the decimal form. It can be observed that the formula measures the average percentage price change relative to the initial price per basis point change in the yield.
When this formula is used for a non-callable bond, it gives the modified duration since there is no change in the cash flow due to change in the yield. But when this formula is used for a callable bond, i.e., a bond embedded with an option, the new prices at the higher and lower yield levels should reflect the value from the valuation model. Duration calculated in this method is called effective duration or option-adjusted duration.
We may summarize the relationships among the duration, modified duration and the effective duration on the following lines:
How are the members of the board of directors of a corporation chosen and to whom do these board members owe their primary allegiance? The Members of a corporation's board of d
We can compute any forward rate using the spot rate. When we tell 3 years forward rate 4 years from now, there are two elements to consider. One is the length of
Define risk. Examine the need for assessing the risks in a project
Alpha and Beta Companies can borrow at the subsequent rates. Alpha Beta Moody's credit rating
A drug company has developed a new painkiller for chronic pains, although it is doubtful whether the new drug actually has any effect. The company conducts a double-blind experimen
What are the assumptions of MM(Modigliani Miller) approach?
what type of financing is appropriate to each fim
What are some of the primary advantages when a corporation has operations in countries other than its home country? What are some of the risks? Foreign operations may decrease
Q. Show the Accept-Reject Criteria? Accept-Reject Criteria:- If the actual payback period is not more than the predetermined payback period...................... Project
The secondary market is a market where the investor purchases a security from another investor rather than from the issuing corporation. This market is secondary
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