Brief of measurement of interest rate risk, Financial Management

Assignment Help:
  • A manager must be able to quantify as to what will result from an adverse change in interest rates to control interest rate risk.

  • Different types of valuation models are in use to determine the value of apposition after an adverse rate move. Two widely used models are: Full valuation model and duration/convexity approach.

  • Full valuation approaches revalue the bond position for a given interest rate change scenario.

  • The characteristics of a bond that affect its price volatility are maturity, coupon rate, and presence of any embedded options.

  • Duration is the first approximation of a bond's price or a portfolio's value to rate changes.

  • Duration is good to estimate the percentage price change for a small change in interest rates but the estimation becomes inferior when you have to estimate larger change in interest rate.

  • The duration of the portfolio is equal to the market-value weighted duration of each bond in the portfolio.

  • A convexity measure can be used to improve the estimate of the percentage price change obtained using duration, particularly for a large change in yield.

 


Related Discussions:- Brief of measurement of interest rate risk

Fraud and society and analytical techniques, Fraud and Society and Analytic...

Fraud and Society and Analytical Techniques: Fraud and Society - The effects and financial consequences of fraud in society including the individual, older people, financial

Demand at each particular exchange rate, The usual number of passengers usi...

The usual number of passengers using the service is dependent upon the demand at each particular exchange rate. At 1·52 Euro/£ expected demand = (0·33·)(500 + 460 + 420) = 460

Foreign exchange rates, Foreign Exchange Rates The proportional va...

Foreign Exchange Rates The proportional value of one currency to other, used to exchange currency from one denomination to another.  For example, one British pound is wort

Debt holders versus shareholders, Debt holders versus Shareholders A se...

Debt holders versus Shareholders A second agency problem arises because of potential conflict between stockholders and creditors. Creditors lend finances to the firm at rates w

Explain the three kind’s non-financial incentives, Q. Explain the three kin...

Q. Explain the three kind’s non-financial incentives? Non-Financial incentives: Incentives which cannot be offered in terms of money are known as non-¬financial incentives. Ind

Role of the public expenditure management system, Question : (a) The ro...

Question : (a) The role of the Public Expenditure Management System (PEMS) is to allocate and use resources responsively, efficiently and effectively'. Briefly explain the abo

Finance, a recent business school graduate, you work directly for the corpo...

a recent business school graduate, you work directly for the corporate treasurer. Your corporation is going to issue a new security plan and is concerned with the probable flotatio

Weighted average cost of capital of firm, Weighted average cost of capital ...

Weighted average cost of capital of Firm: Use the following information to answer the questions. Security Beta Expected retur

Definition of budgetary control, DEFINITION OF BUDGETARY CONTROL As pe...

DEFINITION OF BUDGETARY CONTROL As per the ICMA, BUDGETARY CONTROL is the establishment of budgets, relating the tasks of executives to the requirements of a policy, and the c

Sophisticated methods of mortgage backed security valuation, MBS ...

MBS are the most complicated securities that are sensitive to interest rates. The factors that affect the price of MBS are varied and most of th

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