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.
What is a security? The Securities are claims on financial assets. They can be explained as "claim checks" that give their owners the right to obtain funds in the future. Sec
Future V alue The value of an investment is based on the rate of interest paid at set time periods and at some point in the future. Future values incorporate both the i
Explain official reserve assets and its major components. Answer: Official reserve assets are those financial assets which can be employed as international means of payments.
Extent of Financing Required It is clear that sales are unsure with low, high and medium estimates of demand. This of itself gives a few uncertainty but the reliability and pr
Scenario: You are still a consultant for the Excellent Consulting Group. You have completed the first assignment, developing and testing a forecasting method based on linear regres
Documenting the accounting system There are 3 methods generally used to document the clients system. Narrative notes: Written description of the system Advantages:- C
report on Financial Planning and Forecasting
Z works for HS Company and has been asked to undertake an assessment of any health and safety issues that might be potential hazards in the department which she manages. Z's respon
Q. Importance of the cost of capital? 1. Evaluating financial performance: the actual profitability of the project is compared to the projected overall cost of capital and th
Assignment 2 Decision Tree Assessing Alternatives in Capital Budgeting [see Bailes, J.C., and Nielsen, J.F. (2001, Winter). Using decision trees to manage capital budgets. Manag
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