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:
State the Types of integration Types of integration Horizontal Target company has same operations, and is in the same industry
annual uasage of stock 100,000units carrying cost per unit of stock RM2 order cost RM250 question there is a constraint arising from the floor space of the
Government intervention The government might look for intervene in the take-over bid because of fears that the market share of the combined group would constitute a monopoly wh
What is the importance of leverage in business management of a small scale company
The issuer of the bond has to repay the bondholders the principal by the stated maturity date. This can be repaid by the issuer in one lumpsum payment at the matu
As an investment advisor, you have been approached by a group of professional investors (probably who already have a well-diversified portfolio). They are considering investing in
How does accounts receivable factoring work? What are the benefits to the two parties involved? What are the risks? Factoring is while one firm sells accounts receivable that i
Documenting the accounting system There are 3 methods generally used to document the clients system. Narrative notes: Written description of the system Advantages:- C
Compare and contrast mutual and stockholder-owned savings and loan associations. Some loan and savings associations are owned by stockholders, just as commercial banks and oth
In all previous illustrations, we assumed that coupon payments are paid on annual basis. However, most of the bonds carry interest payment semi-annually. Semi-ann
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