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.
Solutions to shareholders and government agency problemquestion #Minimum 100 words accepted#
what is the meaning of market feasibility? What are its different types with their degree?
Define the term- Cost of capital Cost of capital is the rate of return a firm should earn on its investments for the market value of the firm to remain unchanged. Acceptance of
Financial analysis The purpose of financial statements is to provide information to all the users of these accounts to assist them in their decision-making. It has to be concer
All the bonds are not making periodic coupon payments. Zero-coupon bonds are those bonds where the bondholder realizes interest by buying it at a deep discount to its face
When a company commits (implicitly or explicitly) to granting at-the-money options to employees in the future then we can view them as a forward start options. a) Explain the di
Q. What goals should always motivate the actions of a firm's financial manager and why? Answer: Please note that a minimum of 250 words is required on all responses to the d
name, cost ,features and size
Payback Period It is an amount of time, mainly measured in years; it takes previously the undiscounted cash inflows from a project equal the cash outflow. It indicates the leng
the nu-nu brothers inc. (NNBI) has the following capital structure,
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