Rate changes and duration estimate, Financial Management

Assignment Help:

To calculate duration, we need to first obtain the values for V- and V+ where V- is the price when the yield decreases by certain number of basis points and V+ is the price when the yield increases by same number of basis points. However, the question is how much should be used to shock the interest rates up and down. While calculating duration estimates for option-free bonds the size of shock is not important. But when we deal with complex securities, like bonds with embedded options, even small rate change may change the expected cash flows and as a result determining the price change may not be possible. In case of large rate shocks, it may cause dramatic changes in the expected cash flows. Another draw back of using small changes in interest rate.  The prices used for calculations are based on valuation model. If the valuation model  used is poor, the prices calculated using that valuation model would also be a poor price estimate. When such estimates are divided by small shock in the rates in the denominator, there would be a significant effect on the duration estimate.


Related Discussions:- Rate changes and duration estimate

What theoretical share price share for share exchange, What theoretical sha...

What theoretical share price share for share exchange Establish what theoretical share price may be after the merger in a share for share exchange incorporating the effects of

Buy side analyst, How to Industry analysis and finally stock picking from B...

How to Industry analysis and finally stock picking from Buy-side perspective

Why do analysts calculate financial ratios, Why do analysts calculate finan...

Why do analysts calculate financial ratios? Ratios are comparative measures.  For the reason that the ratios show relative value, they permit financial analysts to compare inf

Factors determining dividend policy, Q. Factors Determining Dividend Policy...

Q. Factors Determining Dividend Policy? (1) Financial Needs of the Firm: - Financial requirement of a firm are directly related to the investment opportunities available to it.

Periodic system, limitations of using a periodic inventory system

limitations of using a periodic inventory system

Explain the major types of audit plans, Explain the major types of audit pl...

Explain the major types of audit plans Three major types of audit plans Strategic -this the long term forward looking audit, it continually gets updated and identifies are

Decentralization, Decentralization This is a company power structure i...

Decentralization This is a company power structure in which authority and decision-making responsibility are diffused throughout various stages of an organization. Decentraliz

Restrictions on investments, Restrictions on Investments: A mutual fund...

Restrictions on Investments: A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment

Calculation of a firms sales returns, a) The combined two-firm concentratio...

a) The combined two-firm concentration ratio of Motorola (approximately 17.5%) and Nokia (35%) is around 52.5% of the market. b) Up to 2 marks for correct definition: Market sha

Computation of working capital, Will you please define the working capital ...

Will you please define the working capital and Calculation of working capital? I need urgent help in my assignment. help me!

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

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!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd