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.
Advantage of mutual funds Mutual Funds are advantageous to individual investors in relation to their direct involvement in investment portfolio activity covering the following
A pharmaceutical company, named "XYZ", plans to deliver trials to three different clinics (C1, C2, and C3). The trials are used for the emergency treatments so XYZ must fulfill all
Determine the operating cash flow: E4-1 The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period
Difference between venture capital and conventional financing
Illustrate the steps of Creative accounting Creative accounting include: 1 Timing of transactions. Delaying or hurrying up the despatch of invoices at the yearend to decr
What are "in-market" mergers? A: An in-market merger is one that occurs between two banks operating in similar geographic area, usually a city or metropolitan area. The merged in
Dividends and interest payments Payment of dividends and interest can either be demonstrated under financing activities or under operating activities. Sum of the 3
You need to tick all the boxes below to acknowledge that your Statement of Advice complies will all the requirements. This checklist needs to be appended to the cover sheet of the
Explain the purchasing power parity, both of the absolute and relative versions. What causes the deviations from the purchasing power parity? Answer: The absolute version of p
Floria Scarpia believes that many of her clients could benefits from using international investments to diversify their portfolios but many are reluctant to invest abroad -especial
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