In this chapter we consider assets whose future values are completely determined by a fixed interest rate. If the asset is guaranteed, as in the case of an insured savings account or a government bond (which, typically, has only a small likelihood of default), then the asset is said to be risk-free. By contrast, a risky asset, such as a stock or commodity, is one whose future values cannot be determined with certainty. As we shall see in later chapters, mathematical models that describe the values of a risky asset typically include a risk-free component. Our first goal then is to describe how risk-free assets are valued, which is the content of this chapter.
Interest is a fee paid by one party for the use ...
Get An Introduction to Financial Mathematics, 2nd Edition now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
