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.
Setting Budget Goals and Objectives: Having collected and analysed all relevant information, and made general forecasts as to the key areas of concern / opportunity and special
Q. What is Purchasing Power Risk? Variations in the returns are caused also by the loss of purchasing power of currency. Inflation is the reason behind the loss of purchasing p
An asset needed by the ABC Corp. can be purchased for $100,000. Maintenance and other ownership expenses will total $20,000 each year for the asset's expected 10-year life. On the
Q. Importance of Inventory Management 1) Inventory helps in smooth and efficient running of business. 2) Inventory provide service to the customers immediately or at a short
Using Southwest Airlines as an example, please identify the largest potential threat, the strategy employed, and what types of capital budgeting projects would be used to operation
considering the following information,what is the prise of the share as per gorden''s model?
The wide gap between maturities poses problems in using the on-the-run issues, especially after five years. Some dealers and vendors use selected off-the-run Trea
Chi Square Test as a Test of Independence In real life decision making, managers often have to know whether the differences between the proportions observed from a number of sa
A paper mill produces two grades of paper viz., X and Y. Because of raw material restrictions, it cannot produce more than 400 tons of grade X paper and 300 tons of grade Y paper i
What is a financial ratio? A financial ratio is a number that convey the value of one financial variable relative to another. Put more easily, a financial ratio is the final
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