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!
Modified duration is used to determine the percentage change in the bond's prices for a 100 basis point (1%) change in the yield. The underlying assumption is that the bond's expected cash flows would not change when yield changes. It means that to calculate the value of V- and V+ in equation (1) the same cash flows used for calculating V0 are used.
The assumption that cash flow would not change when yield changes is not true for all types of bonds. It is true in case of option-free bond but it is not applicable in case of putable and callable bonds. For example, the payments made by the Treasury Department to the holders of its obligations do not change when interest rates change. However, the same is not true for bond with embedded options. The expected cash flows may change significantly with the change in the yield.
Effective duration is a duration calculation for bonds with embedded options. Effective duration takes into account both the discounting at different interest rates and how the expected cash flow may change. Effective duration can be estimated using modified duration if the bond with embedded options behaves like an option-free bond. This behavior occurs when exercise of the embedded option would offer the investor no benefit. As such, the security's cash flows cannot be expected to change given a change in yield. There can be huge difference between the modified duration and effective duration. For example, the modified duration for a callable bond could be 7, whereas the effective duration could be 5. Sometimes it may be the other way round, i.e for certain mortgage obligations the effective duration may be more than the modified duration. Therefore, we can conclude that the effective duration is a more appropriate measure in case of bonds with embedded options.
State the term- Overtrading Overtrading takes place when a company has insufficient finance for working capital to support its level of trading. The company is growing rapi
Examine about Environmental (external) analysis "A study that considers potential environmental effects during planning phase before an investment is made or an operation start
Write a report to the Board of Directors of Solvent Ltd to analyse the performance of companies X and Y and to give recommendation as which of those two investment opportunities is
Cost Principle - Accounting Principle According to this principle all the non-monetary assets of the business are display in the books of accounts at the historical cost that
Determine the factors of financial risk by giving example W. T. L. Company's cost of long-term debt two years ago was 8 percent. This 8 percent was found to represent a 4- per
Does high operating leverage always mean high business risk? Explain. High operating leverage does not all the time mean high business risk. If the companies sales are quite
BigGardens Ltd (BigGardens) is a private company that owns and operates a chain of garden centres in the Bristol area. The company has expanded rapidly over recent years, opening
What is an annuity? An annuity is a series of equivalent cash flows, spaced consistently over time.
A brief scenario for each of two different organisations is presented. You are advised to read both scenarios before answering the questions that follow. Use the scenario details t
a) Critical Path: A, B, E and F. Project completed in 11 weeks. Subtract one mark for each error made. Maximum marks can only be awarded if the candidate explicitly indicat
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