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.
What is a financial management strategy?
1. identify an analytic theme or goal for a fictitious business or something that you are working on (e.g. Maximize revenue in a car dealership) 2. Build an Enterprise Bus Matri
SCL Limited a highly profitable company is engaged in the manufacture of power intensive products.
How are financing costs generally incorporated into the capital budgeting analysis process? Financing costs are typically captured in the discount or hurdle rate when doing IRR
Q. Illustrate about foreign exchange earnings? In theory foreign exchange earnings must not be hedged as the chances of an adverse movement are equivalent to those of a favoura
I am trying to make a payment and I can''t seem to get it to go throught on you all site..
Question 1 Under a hire purchase deal structured by X Finance Ltd. for Y Corporation, the finance company has offered to finance the purchase of equipment that costs Rs. 200 la
What is Dividend Decision Determination of funds requirements and how much of itwould be generated from internal accruals and how much to be sourced from outsideis a crucial
Question: a. Explain what the debt overhang problem is (following the lines of Myers 1977) make sure that you specify what the relevant conflict of interest is and what are the
define ratio analysis. explain the advantages of ratio analysis
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