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.
The effective maturity of a callable bond can be anywhere between the first call date and its maturity date due to the presence of the call feat
Explain Capital Budgeting and its methods.
Create contingency plans for the following scenarios: • One of your highly qualified consultants has given three months notice and is planning to move to a competitor after this ti
How do opportunity costs affect the capital budgeting decision-making process? Opportunity costs reflect the foregone advantages of the alternative not chosen when a capital bu
What is the decision rule for accepting or rejecting proposed projects while using internal rate of return? While the internal rate of return is greater or equal as compare to
Why is it important to study international financial management? Answer: We are now living in a world in which all the main economic functions, that are production, consumption,
Is depreciation the loss of value of fixed assets No. An operative (and not a pseudo-philosophical) explanation of depreciation might be: it is a number that allows us to save
Q. Future Value of a Series of Equal Cash Flows? Quite often a decision may result in the occurrence of cash flows of the same amount every year for a number of years consecuti
Describe the difference between a parallel loan and a back-to-back loan. Answer: A parallel loan contains four parties. One MNC (multinational company) borrows and re-lends to
Advantages and Disadvantages of Investing in Gilts Advantages As the security is issued by the GOI, it has a minimal default risk. Investors have the opportunity to inves
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