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.
Deterministic Model After the macroeconomic, industrial and business analysis of the company chosen is done First of all a point estimate for all the input variables in a valua
Q. Computation of Value of the Firm? Illustration:- EBIT = 50,000 10% Debentures
Swap-Linked Notes: Interest rate swaps are derivative products which help in transforming the cash flows of existing debt issues. These are not only useful in covering the exis
#questi Saven Travel Corporation is considering several investment opportunities in order to diversify its operations. Mr. Saven, president, is trying to determine the firm''''s co
REPORT To: The Directors of Leaminger plc From: A business advisor Date: December 2002 Subject: Acquiring the turbine machine Introduction In financial
discuss the applicability of operating cycle in poultry (consider broilers)
Net Present Value (NPV) In corporate finance, the current value (the value of cash to be received in the future expressed in today's dollars) of an investment in excess of the
Given below are the cash flows of a project. Find out the net present value of the project. Cost of capital is 18% and initial investment is Rs. 2,00,000. Year Cash Flows (lakhs)
how would you incorporate currency exchange risk into the capital budgeting process of foreign investment.
The wide gap between maturities poses problems in using the on-the-run issues, especially after five years. Some dealers and vendors use selected off-the-run Trea
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