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:
When a set of predetermined liabilities are given, the investor must construct a non-callable bond portfolio of homogeneous ratings by considering certain characteris
Have the large bank holding companies increased their market share at the expense of smaller institutions? A: No. A study conducted by the Federal Reserve Bank of New York reve
1. Of course a swaption will be needed. The major reasons being that Bond A is callable after 3 years and matures in 4 years whereas Bond B matures in 5 years. It is understandable
Q. What is Affiliated Company? Affiliated Company - Company or other organization related through common ownership,common control of management or owners or through some other
Bond Price is the purchase value of a bond. It can be priced either at a premium, discount or at par. It is important for the prospective buyer to know how to det
Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk
1. An investor is thinking of investing in a recurring deposit scheme that offers an interest rate of 12% per annum. The investment that he is planning is for the higher education
Who owns a credit union? Explain. The term Credit unions are owned by their members. While credit union members put money in their credit union, they are not exactly "depositin
What is Capital Asset Pricing Model? Please provide me report on Capital Asset Pricing Model. It is about 2000 words count report on topic Capital Asset Pricing Model.
Flowcharts - Documenting the accounting system Depict in outline the sequence of events in a system showing document flow and department or function responsible for every ev
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