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Toán R I

The document covers various financial concepts including discrete and continuous compounding, forward rates, bond pricing, and yields. It explains how to calculate future values, bond prices, and the impact of Treasury rates on borrowing costs. Additionally, it discusses LIBOR forward rates and currency swaps as tools for managing financial risk.

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8 views4 pages

Toán R I

The document covers various financial concepts including discrete and continuous compounding, forward rates, bond pricing, and yields. It explains how to calculate future values, bond prices, and the impact of Treasury rates on borrowing costs. Additionally, it discusses LIBOR forward rates and currency swaps as tools for managing financial risk.

Uploaded by

nampn22413ca
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1.

​ Discrete Compounding
𝑛
𝐹𝑉 = 𝐴(1 + 𝑅) A is invested
n years
𝑅 𝑚𝑛
𝐹𝑉 = 𝐴(1 + 𝑚
) (𝐴. 1) R is interest rate per annum
m times per annum

Ex: With 𝑚 = 4 (since interest is compounded quarterly) and 𝑅𝑚 = 0. 12, the equivalent
rate with continuous compounding is:
0.12
4ln(1 + 4
) = 0. 118 or 11. 8% per annum

2.​ Continuous Compounding

𝑅𝑛
𝐹𝑉 = 𝐴𝑒 (𝐴. 2) e = 2.71828

Comparison with discrete compounding: Continuous compounding results in a slightly higher


future value than discrete compounding as frequency increases.

So sánh với lãi kép rời rạc: Lãi kép liên tục mang lại giá trị tương lai cao hơn một chút so với
lãi kép rời rạc khi tần suất tăng.

Suppose that 𝑅𝑐 is a rate of interest with continuous compounding and 𝑅𝑚 is the equivalent
rate with compounding 𝑚 times per annum. From (𝐴. 1) and (𝐴2), we have:

𝑅 𝑚𝑛 𝑅𝑐𝑛 𝑅𝑐 𝑅𝑚 𝑚
𝐴(1 + 𝑚
) = 𝐴𝑒 ⇒ 𝑒 = (1 + 𝑚
)
𝑅𝑚
⇒ 𝑅𝑐 = 𝑚 ln(1 + 𝑚
) (𝐴. 3)
𝑅𝑐/𝑚
⇒ 𝑅𝑚 = 𝑚 (𝑒 − 1) (𝐴. 4)
Ex: A bank offers a loan with an interest rate of 7% per annum using continuous
compounding. However, interest payments are actually made monthly. What is the equivalent
interest rate when compounded monthly?
0.07/12
𝑅𝑚 = 12(𝑒 − 1) = 0. 0702 or 7. 02% per annum

3.​ Forward Rate


A forward rate is the future zero rate implied by today’s zero rates
𝑅𝑖+𝑅𝑘
𝑖−𝑘
( i,k represent periods )
4.​ Bond Pricing
The bond’s principal (which is also known as its par value or face value) is received at the
end of its life.The theoretical price of a bond can be calculated as the present value of all the
cash flows that will be received by the owner of the bond.
−𝑟1 −𝑟2 −𝑟𝑛
𝑃𝑉 = 𝐴𝐹1 × 𝑒 + 𝐴𝐹2 × 𝑒 +... + (𝐹 + 𝐴𝐹𝑛 × 𝑒 ) PV is present value of the bond
F is face value
5.​ Bond Yields
A bond’s yield is the discount rate.

𝑛
𝐼 𝑃
𝐵𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒 = ∑ 𝑡 + 𝑛 I is interest payment per period
𝑡=1 (1+𝑌𝑇𝑀) (1+𝑌𝑇𝑀)

𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑢𝑝𝑜𝑛
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐵𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒

6.​ Treasury Rates


Treasury rates are the rates an investor earns on Treasury bills and Treasury bonds. These
are the instruments used by a government to borrow in its own currency.
Ex: Imagine Company A wants to build a new factory and needs a $10 million loan from a
bank.
+​ The current 10-year U.S. Treasury rate is 3%.
+​ Banks usually charge a premium of 2% above Treasury rates for business loans.
⇒ So, the loan interest rate = 3% + 2% = 5%. The company can afford the loan and expands
its business, hiring more workers.
→ If Treasury Rates increase, the loan interest rate increases, higher borrowing costs force
companies to reconsider expansions and cancel projects, meaning fewer jobs and slower
economic growth.
→ If Treasury Rates Decrease, the loan interest rate decreases, lower borrowing costs make
companies more willing to expand. Companies hire more workers, boosting economic
growth.

7.​ Determining Treasury Zero Rates


Treasury Zero Rates (or Zero-Coupon Yield Curve) represent the theoretical interest rates for
risk-free bonds with no periodic coupon payments. Instead, these bonds are priced at a
discount and grow to face value at maturity.
𝑛 𝐹
(1 + 𝑅𝑛) = 𝑃𝑉
𝑅𝑛 is zero rates for maturity 𝑛

8.​ OIS Zero Rates


The OIS zero curve is determined using a similar bootstrap method to that used for
determining the Treasury zero curve.The OIS rates for maturities out to one year involve a
single exchange at maturity.They therefore give immediate information about the zero rates
for those maturities. OIS rates for maturities longer than one year are typically for contracts
where there are exchanges every three months. They are the yields on bonds that sell for par
and provide quarterly payments.
Ex:
Maturity (Years) OIS Zero Rate (%)

3 months 2.1%

6 months 2.4%

9 months 2.6%

12 months 2.8%

1.5 years R

A 1.5-year bond has a face value of 100 and quarterly coupons of 0.8. The bond is priced at
par (100).

Solve:
The bond price:
−0.021×0.25 −0.024×0.5 −0.026×0.75 −0.028×1 −𝑅×1.5
0. 8𝑒 + 0. 8𝑒 + 0. 8𝑒 + 0. 8𝑒 + 100 × 0. 8𝑒 = 100
⇒ 𝑅 = 2. 67%

9.​ The forward (future price)


The forward or futures price of an investment asset that provides no income is
𝑟𝑇
𝐹0 = 𝑆0𝑒 𝑆0 is the spot price
𝑇 is the time to maturity of the futures contract
𝑟 is the continuously compounded risk-free rate
When the asset provides income during the life of the contract that has a present value
I, this becomes:
𝑟𝑇
𝐹0 = (𝑆0 − 𝐼)𝑒
When it provides a yield at rate q, it becomes
(𝑟−𝑞)𝑇
𝐹0 = 𝑆0𝑒
A foreign currency can be regarded as an investment asset that provides a yield equal to
the foreign risk-free rate, so that the forward or futures price for a foreign currency is
(𝑟−𝑟𝑓)𝑇
𝐹0 = 𝑆0𝑒
where rf is the foreign risk-free rate (continuously compounded) and S0 is the spot
exchange rate. The value of a forward contract where the holder has the right to buy the
asset for a price of K is
−𝑟𝑇
(𝐹0 − 𝐾)𝑒
where F0 is the forward price, given by one of the formulas above.The value of a forward
contract where the holder has the right to sell the asset for a price of K is similarly
−𝑟𝑇
(𝐾 − 𝐹0)𝑒
10.​LIBOR Forward Rates
It is used to determine the expected borrowing/lending rate for future periods and is widely used
in derivatives pricing, fixed-income securities, and interest rate swaps.
Ex: A bank wants to determine the 6-month forward rate (from 6 months to 1 year) using LIBOR
rates. 6-month LIBOR rate 𝑟1 = 3% and 1-year LIBOR rate 𝑟2 = 3. 5%. Time periods in
𝑡1 = 6 𝑚𝑜𝑛𝑡ℎ𝑠 and 𝑡2 = 12 𝑚𝑜𝑛𝑡ℎ𝑠.

(1+0.035×1)−(1+0.03×0.5)
𝐹0.5,1 = 1−0.5
= 0. 04 = 4%
→ The 6-month forward rate (from 6 months to 1 year) is 4.00%.
This means that if you were to agree on an interest rate for borrowing/lending starting in 6
months and lasting for 6 months, the implied rate would be 4.00%.

11.​Currency Swaps
It is a financial agreement between two parties to exchange principal and interest payments in
different currencies for a specified period. This type of swap is commonly used by businesses and
investors to hedge against foreign exchange risk or to obtain loans in a more favorable currency.

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