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.
Q. Show Social and Regulatory Factors? Regulatory climate and legislation against the environmental degradation may impair the profitability of the industry. Price control, vol
Discuss risk from the perspective of the Capital Asset Pricing Model (CAPM). The Capital Asset Pricing Model, or also known as CAPM, can be employed to calculate the suitable req
ESTIMATING WORKING CAPITAL REQUIREMENTS To facilitate, estimate the extent of working capital requirement of a firm, various factors are to be considered. There are various me
COST OF CAPITAL A project's Cost of Capital is the smallest amount of acceptable rate of return/required rate of return on funds committed to the project. It is a compensation
Types of FRNs In an era of innovations, while changing needs and preferences of the investors trigger introduction of newer FRNs, the borrowers' funding specifications also nec
Commercial Paper (CP) is a short-term unsecured promissory note issued in the open market. It also represents the obligation of the issuer. Normally, it is issued
It is argued that VC & PE houses achieve superior returns through ruthlessly focussing management on short to medium term outcomes. In particular, parsimonious cash management is g
Give two examples of types of companies likely to have high operating leverage.Find examples other than those cited in the chapter. Long distance electricity generating compani
Differences between IAS 14 and IFRS 8 IFRS 8 requires identification of operating segments based on internal reports which are regularly reviewed by management for decision
DISCOUNTING TECHNIQUE is also called present value technique. It is the process of calculating the present value of cash flows. Discounting is determining the present value of a
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