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

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Conclusion

There are a number of factors that can account for the difference between any two money market interest rates. Usually the rate spread is explained by differences in credit risk, liquidity, taxation, and time to maturity. This chapter has emphasized more technical and mathematical factors, such as the method of rate quotation, the assumed number of days in the year, and the manner in which the rate per time period has been annualized. Many interest rates reasonably summarize the two cash flows on a money market security—and a significant subset of those many rates actually are used in practice.

Money market interest rates can be misleading and confusing to those who do not know the differences between add-on rates, discount rates, ...

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