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.
a) Cultural exports are the commercial transfer of values and ideas from one country to another. Canned crab meat is a popular local fragility in Thailand and Viya Crab Products Co
The process of securitization can best be understood by taking the following example. Assume that there exists an NBFC which has hire purchase as its major busine
The Federal Minister for the Environment is worried about the Greenhouse Effect, one outcome of which would be that Adelaide would have a subtropical climate by the year 2015. This
Q. Define the Cash Budget? Cash Budget: - A cash budget is an estimation of cash receipts and cash payments for a future period of time. It is prepared to predict the cash requ
Q. Short terms working capital? 1) Indigenous bankers: private money leased and other country banking used to be the only source of finance prior to the establishment of the
Flex budget
What are the Characteristics of the financing decision There are two characteristics of the financing decision. First, theory of capital structure which illustrates theore
Buying and Selling Securities One of the key features that may occur while investing in financial markets is that sometimes investors overlook the essential factors they should c
What is Business risk It is related to response of the firm's earnings before taxes andinterest, or operating profits, to changes in sales. When cost of capital is used to eval
Q. Illustrate dividend valuation model? The business is being acquired as a going concern and earnings valuations rather than asset valuations are recommended. Even these are b
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