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.
Question 1: (a) Advise a risk averse individual whether to invest his capital in a money market or capital market. Justify your answer. (b) Explain five types of Money marke
Syntax of Accounting Procedure The general accounting practices are: (a) Do not consider any income or gain till the similar is realised in cash; (b) Create or make pr
a) An approx. 3% defect rate (i.e. 0.03 x 300m units) = 9m units per year. b) A apparent definition of Quality Assurance should be awarded, e.g. the management process of guaran
1. Review and analyse financial data for the last year to establish areas which have generated a profit or loss in your organisation. 2. Conduct a research to review reasons for
RELATIONSHIP OF FINANCIAL MANAGEMENT WITH OTHER BUSINESS FUNCTIONS
Extendible reset bonds are floaters in which the issuer is required to reset the coupon rate so that the issue will trade at a predetermined price (usually above
An offer given by charitable trust to develop and build a facility on a 10000 sqmt of plot in a prime locality of pune where 5000 sqmt of area will be used by the trust for housing
Your family purchased a house three years ago. When you bought the house you financed it with a $160,000 mortgage with an 8.5% nominal interest rate (compounded monthly). The mortg
Genital and Reproductive Function: J.Y. is a 43-year-old woman who has detected a lump in the upper outer quadrant of her left breast while performing her monthly self-breast
Q. Define the finance function? Is it a risk-return trade off? What is the basic role of a modern financial manager? What is the basic importance of finance function in the mana
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