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.
You have to make a payment of $1,561.39 in 10 years. To get the money for this payment, you will make 5 equivalent deposits, starting today and for the following 4 quarters, in a b
Expalin the basic concept of financial management and Cost of Retained Earnings and External Equity??? Also explain the hoe can ew calculate the external equity? Help me
Q. What is Disadvantages of IRR Method ? Disadvantages of IRR Method:- (i) Computation of IRR involves tedious calculations. (ii) Occasionally this method produces more t
Q. Illustrate Methods to Manage cash resources? There are several methods which may be of use in managing resources. The particular tool selected will depend on its reliability
how to calculate the average inventory of holding
Monetary Policy The Federal Reserve's goal is to regulate the growth of the monetary aggregates to ensure sufficient credit expansion to foster economic growth, without inflati
Calculate the Future Value of an Annuity: Annuity is stated as periodic payment every period for a number of periods. This periodic payment is the same each year only then it c
Explain the factors affecting the choice of a maximum cash balance amount. The maximum cash balance amount is regulated by available investment opportunities, the expected payb
Q. What is the basic Approach of the financial management ? 1) The first approach view finance as to providing the funds needed by a business on the most suitable terms. This ap
European Community (EC) An economic alliance, evaluated in 1957, designed to encourage trade and economic cooperation between its members. The EC is also called the European
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