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Bond Math: The Theory Behind the Formulas, + Website, 2nd Edition by Donald J. Smith

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Technical Appendix

CHAPTER 1 MONEY MARKET INTEREST RATES

Equation 1.8, which allows the conversion of a discount rate to an add-on rate when both are quoted for the same day-count convention, is derived by assuming that the cash flows, PV and FV, are the same for each rate quotation. To derive the equation, first rewrite equations 1.3 and 1.6.

Equate these two expressions.

(A1.3) numbered Display Equation

Subtract 1 from each side.

(A1.4)

Simplify ...

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