Forecasting Cash Flows

Overview

Fixed income instruments are contracts that specify when a payment is to be made, and how that payment is to be calculated. These contracts do not in general list out all the payments, rather, the terms of the contract dictate how the payments are calculated.

Many types of analysis of fixed income instruments needs the listing of cash flows (see present value for instance). Therefore it is a critical part of fixed income analysis to be able to calculate (or forecast) what the cash flows for an insrument or portfolio of instruments will be.

Forecasting

• Basic Fixed Rate Instruments shows how to construct cash flows for basic fixed income instruments.
• Variable Rate Instruments
• Portfolio Cash Flows shows how to aggregate cash flows computed from a set of instruments, which can include structured cash flows.

Monte Carlo Simulations

Monte Carlo Simulations can be used to simulate cash flows while including risk factors that can impact the actual cash flows. These may include the following:

• Interest Rate Curves
• Variable Rate Instruments
• Modeling Prepayments
• Modeling Defaults
• Structured Cash Flows