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.
Imagine you have been allocated $100,000 which is to be invested in 8 companies listed on the Australian Stock Exchange (ASX). You are required to have a balanced portfolio betwee
Explain Zero coupon bonds The bonds that are sold at a discount from face value and do not pay any coupon interest over their life are known as Zero coupon bonds. At maturity t
XYZ company produces three products X,Y and Z. for the coming accounting period budgets are to be prepared based on following information. Budgeted Sales Product X 2,00
Why do analysts calculate financial ratios? The comparative measures are known as Ratios. Since the ratios show relative value, they permit financial analysts to compare inform
It is a method of budgeting in which the actions that incur costs in every functional area of a company are recorded and their relationships are defined and evaluated. Activities a
A 16% debenture of R5 000 is redeemable at a premium of 10% after 5 years. The fair rate of return on similar debentures is 14% before tax. Calculate the present value of the capit
Calculate the Total Cashflows from 2007 - 2011. Suppose that the company will require to increase their annual investment in fixed assets (representing new equipment) at the simil
strengths and weakness
There are three parts to this question. Please answer all parts. The Chicken Company, a company with headquarters in Switzerland, has a receivable of one million euro, which it wil
A Ltd sells goods at Rs.10.P.U. Its variable cost Rs.7.P.U and fixed cost amount to Rs.1,70,000 it finances all its assets by equity funds. It pays 40% tax on its income. Z Ltd is
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