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.
Linear programming, one of the important techniques of operations research, has been applied to a wide range of business problems. This techniqu
How do opportunity costs affect the capital budgeting decision-making process? Opportunity costs imitate the foregone benefits of the alternative not chosen while a capital budge
why is agency problem important
A friendly potential acquirer sought through a goal organization threatened by a less welcome suitor.
Q. What is Deferred Incomes? Deferred incomes are incomes received in advance before supplying goods or services. They represent funds received by a firm for which it has to su
Which is lower for a given company: the cost of debt or the cost of equity? Explain: Ignore taxes in your answer . The cost of debt is all the time less as compared to the cost
Savings and loan associations Historically savings along with loan associations (S&Ls) and thrift institutions have concentrated mostly on residential mortgages by acquiring fu
In financial analysis, interpolation is used widely in: Determination of internal rate of return of a project. Finding out the yield to maturity (ytm)
What is Performance ratios ROCE Return oncapital employed (ROCE)= (Profit before interest and tax (PBIT) / Capital employed) * 100% ROCE measures profitability and illu
Q. Explain demerits of accept-reject criteria? Demerits of ARR:- (i) It utilizes accounting income rather than cash flows: - The principal short coming of ARR schema is th
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