Scribd
Upload
50 views2 pages

Formulae Sheet

This document contains formulas for calculating interest rates, bond prices, forward rates, yield to maturity, and forward and futures prices of fixed income securities. It defines formulas for simple and continuous compounding of interest rates. It provides the discounted cash flow method for calculating bond prices based on coupon payments, maturity date, and spot or continuously compounding rates. Formulas are also given for calculating the forward rate agreement, bond par yield where coupon equals yield to maturity, and the fair price of forward and futures contracts.

Uploaded by

Vijay Bharath
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
50 views2 pages

Formulae Sheet

This document contains formulas for calculating interest rates, bond prices, forward rates, yield to maturity, and forward and futures prices of fixed income securities. It defines formulas for simple and continuous compounding of interest rates. It provides the discounted cash flow method for calculating bond prices based on coupon payments, maturity date, and spot or continuously compounding rates. Formulas are also given for calculating the forward rate agreement, bond par yield where coupon equals yield to maturity, and the fair price of forward and futures contracts.

Uploaded by

Vijay Bharath
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Fixed Income Securities

Formulae Sheet. Class Test #1. Feb 28th, 2011

Interest Rates
Simple compounding A 1+ R m
nm

where m is the compounding frequency per year, and n is the number of year to compound the principal A: Continuous compounding AeR(0;T )T

Bond price (discounted cash method) ow


P V (Bond) = = = PT PT PT
t=1 t=1 t=1

CFt (1 + Rs (0; t))t CFt exp ( Rc (0; t) t) B(0; t)CFt ; where

CFt is the cash at time t ow B(0; t) is the price of the discounted bond paying $1 at time t Rs (0; t) is the simple compounding spot rates from time 0 to time t Rc (0; t) :::is the continously compounding spot rates from time 0 to time t

Bond price formula


If the bond pays a constant coupon rate c, and y is the discount rate that applies to all maturities. Then the price of a coupon paying bond with maturity T and the face value of F is c F 1 F 1 + P0 = T y (1 + y)T (1 + y)

Forward rates
Simple compounding (1 + R (0; y))y F (0; x; y) = (1 + R (0; x))x
1 y x

where F (0; x; y) is the forward rate agreement that is locked in at date t = 0; to be applied from time x to time y 1

Continuous compounding F (0; x; y) = R (0; y) + (R (0; y) R (0; x)) x y x

Yield to maturity
Yield to maturity for a n maturity coupon paying bond with the cash CFi on each ow year i = 1::n is CF2 CF1 CFn + ; P = 2 + :::::: + 1 + y (1 + y) (1 + y)n where I have assumed simple (annual) compound above. However, if we use continuous-compounding and assume that the cash CFi on each time ow ti is P = CF1 e y t1 + CF2 e y t2 + :::::: + CFn e y tn :

Bond par yield


A par bond is a bond with a coupon identical to its yield to maturity. The bond par yield c (n) is the coupon rate such that a n year maturity xed bond that pays such coupon rate annually is a par bond. Let say if $100 is the bond face value, then s 100 c (n) 100 + 100 c (n) 100 c (n) + = 100: 2 + :::::: + 1 + R(0; 1) (1 + R(0; 2)) (1 + R(0; n))n The bond par yield is thus 1 c(n) = Pn
1 (1+R(0;n))n 1 i=1 (1+R(0;i))i

Forward and Futures price

1 B (0; n) : = Pn i=1 B (0; i)

For an underlying security with the present value B0 ;the fair price for a forward contract to buy/deliver this asset at the future date T is Continuous compounding F0 = B0 eR(0;T )T Simple compounding F0 = B0 (1 + R(0; T ))T

You might also like