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.
Profitability Index (PI) : It is a ratio of the present value of the total cash benefits to the present value of the net cash outlay. The higher the PI, the higher the return.
Is there an optimal capital structure? What is it and how can it be calculated? There is no optimal capital structure. Capital structure is a variable which depends on the incl
Define the term- Cash purchases Shareholders of the target company are bought out completely and have no further stake in business. This is good if predator shareholders want
There are two important term structure theories related to the shapes of the yield curve. First is the Expectations Theory and the second is Market Segmentations
Why the term objective is used for The term is used in a rather narrow sense of what a firm must attempt to achieve with its financing, investment and dividend policy decisions
What are financial markets? Why do they exist? Monetary markets are where financial securities are sold and bought. They exist mainly to bring surplus economic units (those ha
Q. Illustrate Miller-Orr model recognises? The Miller-Orr model recognises which cash balance requirements are likely to fluctuate and that active management is required in r
The Rise of Derivative Market: In the 1980s, the process of liberalization and deregulation of the financial markets gained momentum when the British and American leadership l
Briefly outline the necessities of the UK version of ISA 700/ 750/ 706 and discuss the factors which would manipulate you as the external auditor in forming an opinion on the finan
It is in the form of third-party guarantees which protect against losses up to a particular fixed level. This is available in the form of a corp
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