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.
Investing Surplus Cash : Cash not required for temporary periods of short durations can be invested in near-cash assets, i.e. marketable securities which are readily convertible in
Preferred Stock This is a category of capital stock that will gives its holders preference over common stockholders in the distribution of earnings or rights to the assets o
Full, Fair and Adequate Disclosure The architecture of business has evolved from proprietorship to partnership to joint stock companies or publicly held companies. Except fro
Question 1 What is Depreciation? Question 2 What are the elements of an accounting system? Question 3 How do you prepare Flexible Budget? Question 4 Briefly explain
What are the advantages and the disadvantages of a new stock issue? A new stock issue increases funds and decreases the riskiness of the firm. It as well tends to send a negat
The Pennington Corporation issued a new series of bonds on January 1, 1979. The bonds were sold at par ($1,000), have a 12 percent coupon, and mature in 30 years, on December 31,
Previous MOS = 750 - 270 = 480 aircraft; Revised MOS = 750 - 420 = 330 aircraft Explanation that a lower MOS = lower levels of profit and therefore exposes the business to more
At the end of March, 20X6 the balances in the several accounts of Nitin & Company are as follows:
This is again a distinction which becomes important in case of a default. The senior bondholders have to be paid before the subordinate bondholders. This means th
The director of capital budgeting for a firm has recognized two mutually exclusive projects, A and B, with the following expected net cash flows:
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