Introduction to Fixed Income Analytics: Relative Value Analysis, Risk Measures, and Valuation, Second Edition

1

The interest rates used to determine present values are often called “discount rates.”

2

We see in Chapter 13 that the payments must be adjusted by the number of days in the payment period.

3

The discount factor is

1

(1 + Required semiannual rate)^{Periods from now}

4

Compounding interest continuously is an example of the more general process of exponential growth, which can apply to a number of phenomena (e.g., population growth).

5

The exponential function is transcendental so our value for e (2.71828) is only an approximation. In fact, e has an infinite number of decimal places that do not repeat.

6

When the interest rate is 100% and compounded hourly on an original principal of $1, the future value is $2.71813 while continuous compounding gives the same number out to three decimal places.

7

Moreover, as explained in later chapters a complex security is a package of zero-coupon bonds with at least one option attached.

8

The Treasury also issues Treasury inflation-protected securities (TIPS), which are discussed in Chapter 14.

9

The reason for this adjustment is that the observed price and yield may reflect cheap repo financing available from an issue if it is “on special.”

10

To analyze the profit/loss potential of these transactions, see, for example, Bloomberg’s Strip/Reconstruction Analysis function (SPRC <Govt>).

11

If we had not been working with a par yield curve, the equation would have been set to the market price for the 1.5-year issue rather than par value. ...