Modified duration is a concept that interest rates and bond prices move in opposite directions. It tells you how sensitive a bond is to interest rate changes. It is expressed in a formula that expresses the measurable change in the value of a security in response to a change in interest rates. Key points about…
‘Duration’ or Macaulay duration measures the price volatility of fixed income securities. As the term suggests, duration is expressed as a number of years and measures a bond’s sensitivity to change in interest rates. Usually, the higher the duration, the more is the volatility in the prices. To be precise, it measures the change in market…
The term capital reserve is sometimes used for the capital buffers that banks have to establish to meet regulatory requirements which are different from cash reserves that banks to maintain as per Central Bank (RBI) regulations. In general terms, a capital reserve is an account on the balance sheet of a company that can be…
Trial balance is a part of accounting process which is a list of debit and credit balances taken from all the ledger accounts. The trial balance may be prepared on daily or weekly or monthly or at the end of the accounting period to check the arithmetical accuracy in recording and posting .The periodicity of…
Types of accounting errors include ‘Error of principle’,’ Error of Omission in accounting’, ‘Error of commission’, ‘Compensating Error’, ‘Error of original entry’, ‘Complete reversal of entries’. Error of principle in accounting: When correct amount is posted to wrong type of account, such error is called error of principle. Suppose machinery installation charges is debited to…
We may observe that some banks as well as dealers of automobiles and electronic items offer discounted loans to their customers. Discounted loans are the loans that have the interest payment subtracted from the principal before the loan is disbursed. For example, consider a customer pays Rs.100/- in a year for an item costing Rs.95/-.…
(This post elucidates on what is annuity, what is ordinary annuity, how to calculate present and future value of annuity along with formulas for calculation of annuity values) An annuity can be defined as a sequence of equal payments made at equal intervals of time. Equated Monthly Installments (EMIs) of loan repayments, monthly remittance of…
The books held by the banks may be identified as banking book and trading book. Banking book held by the bank is important for the risk management practice; more so in the context of capital treatment of banks’ balance sheet items under Basel framework. In accounting jargon banking book is referred to registers of accounts…
Discount rates, also known as discount factors, refer to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. Another meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities. Third system of calculating discount rate…
Companies across the world, while reporting the financial statement abide by the specific accounting regulations of their country of business. For example, companies that have business activities in India have to adopt the Indian Accounting Standard (abbreviated as Ind-AS) while reporting the financial statement, similarly, the Generally Accepted Accounting Principles (GAAP)’ of the US are…