Professional Documents
Culture Documents
1
1.1
1.2
i(m)
1+
m
1+i=
!m
d(m)
1
m
1d=
!m
1.3
Force of Interest
1 d
a(t)
a(t) dt
1 d
=
A(t)
A(t) dt
t =
Rt
a(t) = e
s ds
1.4
Power Series
x2 x3
+
+ ...
2
3
x2 x3
+
...
ln(1 + x) = x
2
3
ex = 1 + x +
1.5
R t2
a(t1 )
= e t1 t dt
a(t2 )
No formulas
Basic Annuities
S = (f irst term)
3.1
[1 (ratio)N ]
1 ratio
Annuities
1 vn
i
1 vn
a
n =
d
a
n = (1 + i)an = an1 + 1
an =
3.2
Accumulated values
(1 + i)n 1
i
(1 + i)n 1
sn =
d
sn = (1 + i)sn = sn+1 1
sn =
3.3
Deferred annuities/perpetuities
= v m an = am+n am
1
a =
i
1
a
n =
d
1 1
=1
d
i
m| an
3.4
Annuity tricks
a2n
= 1 + vn
an
a2n = an + v n an
= (1 + v n )an
a3n = an + v n an + v 2n an
= (1 + v n + v 2n )an
4
4.1
an
(m)
sn
1 vn
i
(m)
= (m) an = s1 an
(m)
i
i
(1 + i)n 1
=
i(m)
=
(m)
a =
(m)
(m)
a a
=
a
n =
4.2
i(m)
1
m
1 vn
A = P an + Q
Increasing annuities
a
n nv n
i
sn n
(Is)n =
i
sn1 (n + 1)
=
i
(Ia)n =
Decreasing annuities
n an
i
n(1 + i)n sn
(Ds)n =
i
(Ia)n + (Da)n = (n + 1)an
(Da)n =
Increasing perpetuities
1
1
1
= + 2
id
i
i
1
= 2
d
(Ia) =
(I
a)
4.3
a
n
i
(Ia)n
(m)
a
n nv n
i(m)
1
1 2
2 3
= PV
,..., , ,..., , ,...
m
m m
m m
=
(m)
(m) a
n nv n
=
a
(m)
n
i
1 2 3
,
,
,...
= PV
m2 m2 m2
n nv n
a = a
I
n
4.4
1+k
1+i
n
ik
=va
n i0
with 1 + i0 =
1+i
1+k
Palindromic annuity
n
P V (1, 2, 3, . . . , n 1, n, n 1, . . . , 3, 2, 1) = an a
P V (1, 2, 3, . . . , n 1, n, n, n 1, . . . , 3, 2, 1) = an+1 a
n
5
5.1
Yield Rates
Reinvestment rates
i0
5.2
i0
2I
A+BI
with A = amount at beginning, B = amount at end and I = interest earned.
i=
5.3
=1+i
A
A+x+B
5.4
All members of the club, regardless of when they began to invest, get the
same yield rate.
- Investment year method (IYM):
Interest is credited in a way that recognizes when a member joined the club.
6.1
Amortizing a loan
Duration
t
Payment
R
Interest Paid
It = iBt1
Principal Repaid
Pt = R It
Oustanding Principal
Bt = Bt1 Tt
an
ian = 1 v n
vn
an v n = an1
2
..
.
1
..
.
ian1 = 1 v n1
..
.
v n1
..
.
an1 v n1 = an2
..
.
t
..
.
1
..
.
iant+1 = 1 v nt+1
..
.
v nt+1
..
.
ia1 = 1 v
a1 v = 0
Total
n an
an
With payments of
L
an
6.2
Sinking funds
- Interest rate on loan = i
Interest rate on sinking fund = j
- Periodic interest payment on loan = It = i B0
- Periodic sinking fund deposit SF D =
- Total periodic payment R = i B0 +
B0
sn j
B0
sn j
7
7.1
Bonds
Price of a Bond
If C is the redemption value, F the face amount and r the coupon rate,
then:
P = F r an i + Cv n
If F r = Cg (usefull when n is unknown),
P = C + (F r Ci)an
and
P =
7.2
g
(C Cv n ) + Cv n
i
7.3
n Cg + C P
n
2 (P + C)
Financial Instruments
9
9.1
D
ik
n
P = 100 1
d
360
1+i
1+r
If st is the spot rate up to year t and ft is the forward rate between year t
and t + 1,
(1 + st+1 )t+1 = (1 + st )t (1 + ft )
X CFt
P =
(1 + st )t
t
9.2
Duration
- Macaulay duration
P
t
t t v CFt
D= P
t
t v CFt
- Modified duration
D
P 0 (i)
=
P (i)
1+i
P (i + i) P (i) M odD P i
M odD =
- Portfolio duration
D=
9.3
P1 D1 + P2 D2 + P3 D3
P1 + P2 + P3
Convexity
P
C=
tt
(t + 1) v t+2 CFt
P t
t v CFt
P (i + i) P (i) M odD P i +
1
C P i2
2
9.4
Immunization
Redington immunization
- P V (assets) = P V (liabilities)
- PA0 = PL0
- PA00 = PL00
Full immunization
- P V (assets) = P V (liabilities)
- PA0 = PL0
- One asset CF before and one after liability CF
Interest-sensitive cash flows
P (i h) P (i + h)
2hP (i)
P (i + h) + P (i h) 2P (i)
Ef f ective convexity =
h2 P (i)
Ef f ective duration =
10
Introduction to Derivatives
No formulas
11
Forward Contracts
F orward = ST K
12
Options
- Call options
P ayof f (Call) = (ST K)+
P rof it(Call) = (ST K)+ F V [C(K, T )]
- Put options
P ayof f (P ut) = (K ST )+
P rof it(P ut) = (K ST )+ F V [P (K, T )]
- Put-Call Parity
C(K, T ) P (K, T ) = S0 eT KerT
10