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.
Management Accounting: Management accounting on the other hand tends to focus internally. Reports generated through management accounting processes will be used by the organisa
Angel Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the
make an cash conversion cycle of cabbages
Bid The price buyers provide to acquire securities or privacy from sellers.
type of assets for ppt from t.y.bom com student in commerce department in financial management
Futures Contract It is an obligation to purchase or sell an asset at an agreed-upon price on an exact future date. The buyer commits himself or herself to buy the asset, and th
Q. What is Alternative Minimum Tax? Alternative Minimum Tax (AMT) - Tax imposed to back up the regular income tax imposed onCORPORATION and individuals to guarantee that taxpay
caselets of bajaj electronics
Explain how the cash budget and the capital budget relate to pro forma financial statements. The cash budget depicts the projected flow of cash in and out of the firm for fixed
Implementing Systems Effectively: Much of the accounting process has been taken over by office automation systems. Whereas once the vast majority of bookkeeping and reporting t
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