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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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CHAPTER 1

Money Market Interest Rates

An interest rate is a summary statistic about the cash flows on a debt security such as a loan or a bond. As a statistic, it is a number that we calculate. An objective of this chapter is to demonstrate that there are many ways to do this calculation. Like many statistics, an interest rate can be deceiving and misleading. Nevertheless, we need interest rates to make financial decisions about borrowing and lending money and about buying and selling securities. To avoid being deceived or misled, we need to understand how interest rates are calculated.

It is useful to divide the world of debt securities into short-term money markets and long-term bond markets. The former is the home of money market instruments ...

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