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!
Cash flow duration, like effective duration, considers the change in the cash flow due to prepayment with the change in the interest rate. In effective duration, cash flows are calculated using the Monte Carlo method, but in cash flow duration the cash flows are calculate using static methodology. Following are the steps followed to calculate cash flow duration:
Cash flows are calculated based on some prepayment assumptions.
Using the calculated cash flows and the market price (P0), the cash flow yield is computed.
Cash flow yield is then increased by Δ y and the new prepayment rate at that higher cash flow yield is determined from a prepayment model. The prepayment rate would be lower because of the higher yield.
Using this lower prepayment rate, we can arrive at cash flow and the value of the cash flow using the higher cash flow yield as the discount rate (P+).
Similarly, cash flow yield is decreased by Δy and the new payment rate at lower cash flow yield is calculated. Then, using this higher prepayment rate, cash flow and the value of the cash flow using the lower cash flow yield as the discount (P-) is calculated.
Once we calculate P+ and P-, we can calculate the duration using the general formula of duration i.e.,
Duration =
When we compare modified duration, effective duration and cash flow duration, modified duration is considered inferior to that of cash flow duration. This is because modified duration ignores the changes in prepayment due to interest rate changes. Cash flow yield is based on naïve assumption about how prepayments may change; in contrast, Monte Carlo simulation model is based on more sophisticated analyses of how the cash flow can change when interest rates change. The effective duration computed using Monte Carlo method is considered superior to cash flow duration.
How does the market determine the fair value of a bond? The bond’s fair value is the present value of the bond's coupon interest payments plus the present value of the face value
What does the “weight” refer to in the weighted average cost of capital? The weight considered to in weighted average cost of capital consider the portion of the total capital in
Determine the important ways of financing Financing could be by two ways: debt (loans from different sources such as financial institutions, banks,public etc.) and equity (capi
a) Suppose that the real risk-free rate, r*, is 3% and that inflation is assumed to be 7% in Year 1, 5% in Year 2, and 4% after that. Suppose also that all Treasury securities are
Clearing and Settlement The Treasury Bills are available in physical form if an investor desires so. The market is mostly dominated by institutional players who have a facility
Determine the Amount of financing required The last factor determining company's cost of funds is the amount of financing required, where cost of capital increases as the fin
The Japanese Pension Fund System The Japanese pension system is a multi-pillar system. Public and private pension schemes are the two important pillars. The first tier is the Ba
1. Let's look at the cash flow of the volatility (variance) spread swap: - ( σ 2 Nasdaq - σ 2 S & P 500 ) N 2 It is noticeable from this expression that investor
Regional Banks Large banks like First Norwest, Chicago, Mellon and Crocker function regionally at the national level in a fashion same to money center banks. Regional banks ser
Briefly discuss some variants of the basic interest rate and currency swaps. Answer: In place of the basic fixed-for-floating interest rate swap, there are as well zero-coupo
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