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.
An average should be: (a) vigorously defined, (b) easy to compute, (c) capable of simple interpretation, (d) dependent on all the observed values, (e) not unduly influenced by one
Process of Ambiguity - profit maximisation criterion One practical difficulty with profit maximisation criterion for financial decision making is that term-profit is a vagu
What are the benefits and drawbacks of financial hedging of the firm’s operating exposure vis-a-vis operational hedges (like relocating manufacturing site)? Answer: Financial he
Advantages of ARR: It is simple to calculate and easy to catch. With the help of this technique, direct comparisons among proposed projected of varying lives with no bu
QUESTION An audit team is currently engaged in planning the audit of the financial statements of E Limited as at 30 June 2007. This was the first accounting period during which
Assume that ABC is considering opening an ice cream shop in Amsterdam. The shop will cost 1.8 million Euros, and the present value of the expected cash flows from the store is 1.4
The attached file (MFR & FFM Ass Returns Data.xls) gives 132 months returns for thirty securities drawn from the FT ALL share index as well as the returns on the FT ALL share index
What is the maximum price that you would be willing to pay for a constant growth stock that has the following characteristics: (a) Dividend (Has Paid): $3.25, (b) Growth: 7%, and (
Banks like to make short-term, self-liquidating loans to businesses. Why? Banks like to be capable to see where the funds are similarly to come from like the borrower is able to
Q. Criticism of Wealth Maximization? i) The objective of wealth maximization is not, necessarily, socially desirable. ii) There is some controversy whether the objective of
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