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.
Introduction to financial management: Meaning and defecation of the financial management Finance function Scope and content of financial function Functions and
In an integrated world financial market, a financial crisis in a country can be rapidly transmitted to other countries, causing a global crisis. What kind of measures would you pro
An issue with a put provision included in the agreement grants the bondholder the right to sell bonds back to the issuer at a pre-specified rate
Explain the conditions under which the forward exchange rate will be an unbiased predictor of the future spot exchange rate. Answer: the conditions when forward exchange rate
What are compensating balances and why do banks require them from some customers? Under what circumstances would banks be most likely to impose compensating balances? Compensa
Q. Describe about Self-Employment Tax? Self-Employment Tax - Most individuals who are in business for themselves, like PARTNERS, SOLE PROPRIETORS or independent contractor ar
Solutions to shareholders and government agency problemquestion #Minimum 100 words accepted#
calculate
Yellow: is the company which their stock performance was forecasted by analyst Blue: is the name of the company which made the recommendation by the analyst who work for it R
Have the large bank holding companies increased their market share at the expense of smaller institutions? A: No. A study conducted by the Federal Reserve Bank of New York reve
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