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.
Prevention of Risk - Method of risk management In case of this method, the business avoids risk by taking appropriate steps for prevention of business risk or avoiding loss, su
Modern approach at financial problems With the advent of technology and need to tighten shipsdue to competition, financial management became as much a science as art. Efficient
Explain the term StakeHolders The range of stakeholders may comprise directors/managers, lenders, shareholders, employees suppliers and customers. These groups are probable to
The credit term from the supplier is 2/30, net 60. Question: Calculate the effective annual rate if the firm does not take the discount.
Blue Sky It refers to laws that safeguard investors from being misled by investment people who misrepresent the significance value of investments to get the money of the finan
Q. Define Double-Entry Bookkeeping? Double-Entry Bookkeeping - Method of recording financial transactions in that every transaction is entered in two or more accounts and inclu
Credit analysis is the financial analysis used for determining the creditworthiness of an issuer using various quantitative and qualitative factors. The four Cs an anal
Matching or Accrual The accrual concept makes a distinction among the receipt of cash and the right to receive it, and the payment of cash and legal obligation to pay it.
Individual/Borrower Rating This includes rating a borrower to whom a loan/credit facility may be sanctioned.
Identify the parties by name that have an obligation: a. Buyer/Alpha hears a rumor that the toys have not been manufactured according to the expected specifications for such t
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