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

How to finance the exit of the financiers, How to finance the exit of the f...

How to finance the exit of the financiers The company would have to decide how to finance the exit of the financiers. Considerations comprise: (i)  Selling shares to the pub

Bonds with warrants, Bonds with Warrants: Warrants are usually attached...

Bonds with Warrants: Warrants are usually attached with the bonds or preference shares to attract the investor. The objective is to induce the potential investors to subscribe

Strategic management, Develop and implement strategic plan using bounce fit...

Develop and implement strategic plan using bounce fitness as case study

Special considerations for high-yield corporate bonds, High-yield ...

High-yield bonds are issued by organizations that do not qualify for "investment-grade" ratings by any one of the leading credit rating agencies

How working capital affect incremental cash flow estimation, How and why do...

How and why does working capital influence the incremental cash flow estimation for a planned large capital budgeting project?  Explain. Many large projects need additional worki

What can financial institution do for surplus economic unit, What can a fin...

What can a financial institution often do for a surplus economic unit that it would have difficulty doing for itself if the surplus economic unit (SEU) were to deal directly with a

Explain the savage friedman hypothesis, Question: (a) Describe the axio...

Question: (a) Describe the axioms of utility. (b) An economic agent has a logarithmic utility function, U(W) = lnw and has initial wealth $20,000. She is offered the sub

6 KEY STAGES OF INVESTMENT DECISION WITH APPROPRIATE DIAGRAM, 6 KEY STAGES ...

6 KEY STAGES OF INVESTMENT DECISION WITH APPROPRIATE DIAGRAM

Dividend yield plus growth in dividend process, Q. Dividend Yield plus Grow...

Q. Dividend Yield plus Growth in Dividend process? Dividend Yield plus Growth in Dividend process: - This process is used to compute the cost of equity capital when the dividen

Calculate the expected return and standard deviation, Benjamin Tang current...

Benjamin Tang currently has holdings in the following three companies:                                                                             E(R)                      σ

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