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!
Modified duration is used to determine the percentage change in the bond's prices for a 100 basis point (1%) change in the yield. The underlying assumption is that the bond's expected cash flows would not change when yield changes. It means that to calculate the value of V- and V+ in equation (1) the same cash flows used for calculating V0 are used.
The assumption that cash flow would not change when yield changes is not true for all types of bonds. It is true in case of option-free bond but it is not applicable in case of putable and callable bonds. For example, the payments made by the Treasury Department to the holders of its obligations do not change when interest rates change. However, the same is not true for bond with embedded options. The expected cash flows may change significantly with the change in the yield.
Effective duration is a duration calculation for bonds with embedded options. Effective duration takes into account both the discounting at different interest rates and how the expected cash flow may change. Effective duration can be estimated using modified duration if the bond with embedded options behaves like an option-free bond. This behavior occurs when exercise of the embedded option would offer the investor no benefit. As such, the security's cash flows cannot be expected to change given a change in yield. There can be huge difference between the modified duration and effective duration. For example, the modified duration for a callable bond could be 7, whereas the effective duration could be 5. Sometimes it may be the other way round, i.e for certain mortgage obligations the effective duration may be more than the modified duration. Therefore, we can conclude that the effective duration is a more appropriate measure in case of bonds with embedded options.
Certified Public Accountant (CPA) - ACCOUNTANT who has satisfied education, experience and examination requirements of her or his jurisdiction essential to be certified as a public
State the meaning ofUnlimited profit sharing Unlimited profit sharing means that equity shares have an unlimited potential for dividend payments and price appreciation. Which i
Rating Elements A rating agency earns its reputation by assessing the client's operational performance, managerial competence, management and organiza
Identify and describe three types of start ups firms. Give an example of one you have dealt with. What is a business plan, what are its major components, and why is it important
What are the strategies in managing your finances? How it should be monitor?
Question: You have just been appointed the secretary of the ALM Committee (ALCO) of ABN Bank. The ALCO members have some queries relating to the liquidity risk faced by the ban
ESSENTIAL FEATURES OF A SOUND CAPITAL MIX A sound or an appropriate Capital structure should have the following essential features : highest possible use of leverage
Question: On 1st October 2001 a man then aged 34 took out an endowment assurance policy with a sum assured of $100,000 payable on survival to age 50 or at the end of the year o
Define depreciation expense as it appears on the income statement. How does depreciation affect cash flow? The term accounting depreciation is the allocation of an asset's init
QUESTION 1 (a) What are the differences between futures and forwards? (b) Clearly explain the following position on options i) Going long on a call option ii) Going lo
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: +1-415-670-9521
Phone: +1-415-670-9521
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd