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5

Fed Funds are quoted on an annual basis so 0.5% means half a percent per year. The day count convention used is Actual/360 (note the use of 360, not 365 or 365.25. This old convention is common to many US money market instruments). So if you borrow 1 USD for a single day you would pay 0.005/360 in interest.


3

From a note of P. Krugman (link): So no it is not. Why ? I would say 3 cause: First: Dynamics, saving rates are longterm figures. Offer and demand would be different for these products. Some time there is a lack of liquidity and a need of financement, so a huge demand in short term bonds. Second: bank margin, reserve policies, they have to earn some ...


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For portfolios comprised of instruments in the U.S., Britain or other countries with fairly low credit risk to the government, this is traditionally done by trading various maturities of treasury bonds. A simple technique is to divide your portfolio instruments into "buckets" of duration, say 0-2, 2-5, 5-10, and 10+ years. Then, you sum up the exposure in ...


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I'm giving no assurance that this model is rigorous/functional. It also appears that time steps are severely limited. In general, though, the only way to ensure that something is created well is to create it yourself. I have been burned by canned functions/models in the past, so I avoid them whenever able or if I'm doing anything that is actually ...


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Some models do use ln(r_t), like Black–Derman–Toy and the Black–Karasinski models. Mainly to avoid negative interest rates in low rates / high volatility environments through the use of the log-normal distribution. Negative rates can wreak havoc in option premiums for example. They are interest rates indeed, that we call short rates, not yield on ...


1

These are not yield. They are instantaneous short rates which are not directly observable in the market.


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Look this is just a geometric sum: Assume interest is paid monthly at rate $r = 0.08/12$ (you can use the exact monthly equivalent if you want) and let $x_n = $total after $n$ months (including that month's interest and deposit). So $x_0= 100$ and $x_{n+1} = x_n(1+r) + d$, where $d = 5$ is your deposit amount (added at the end of the month). Applying the ...


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In the industry the model I have used is the 'shifted Sabr' where: $dx(t) = \sigma(t) [x(t)-c]^\beta dW(t)$ $d\sigma(t) = \alpha \sigma(t) dZ(t)$ $dW(t)\ dZ(t) = \rho\ dt$ This allows for rates down to the parameter $c$. If you set, for example, $c=-200bp$ then you can have negative rates. You can define a CIR variant in an analogous way. I have used ...


1

t.f thanks for the answer. You say that yields can't go negative in CIR. But if r0 (say 1d rate) is negative (which is the case in many govies today), I guess yields can be negative? And you will in this case be able to actually calibrate a CIR, which gives negative yields in the short end? My question might seem a bid odd, but I was just wondering? But ...


1

As you say, in the CIR model with usual assumptions the short rate cannot go negative. This means that yields in the model are always poaitive, so it will not be a good fit to a yield curve which is negative for short maturities. If you really do want the CIR model, there is a weird extension you could try: $$ dr_t = \kappa (\theta - r_t) dt + \sigma ...


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Actually, I want to have the calibration model to calibrate parameter such as "a" and "sig" based on swaption volatilities and market price of swaption. For the trinomial model, I can manage to implement it.


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As a saver you are happy to receive interest but as a borrower the tables are turned and you have to pay interest on the outstanding balance. It is a different perspective that you may not thought about before. Basically you should try to reduce the interest you are paying to the minimum necessary. For example to buy a house you may need to get a ...


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Further to a post here, you can appreciate by the interest rate and depreciate by the inflation rate at the same time like this: principal p = 1000 interest rate r = 0.03 inflation i = 0.02 number of years n = 10 p (1 + r)^n (1 + i)^-n = 1102.48 The calculation can be simplified with a factor x: x = i (1 + r)/(1 + i) = 0.0201961 p (1 + (r ...


1

This calculator does not include inflation in whatever interest rate you specify (I checked). Usually, the rate quoted by banks is the nominal interest rate, which is simply how much your capital will appreciate with inflation (e.g. higher inflation would yield higher returns). It does not take into account purchasing power and is calculated as follows: ...


1

My personal preference is to use OIS rate for recent years, and LIBOR when OIS isn't available. If neither is available, CB target rate can also be used.


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I believe in the literature they use either the T-bill rate or short term bank deposit rate.


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I think that you have to distinguish between a 'fiat' (modern) monetary system and a 'gold standard' one. But sustainability will always be ensured endogenously, one way or another. Fiat money is created whenever a loan is made, and the \$50 you describe will be created endogenously in the economy. Advocates would call it a virtous rather than a vicious ...


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The interest does not necessarily come from another loan. The ECB is paying interest to banks which is essentially to create ("print") new money. It is a fact, that the money supply is constantly growing over time, which in a simple model would just equal the interest paid out on loans. That does not necessarily have something to do with the economy being ...


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Forward points are calculated by the short term interest rate desks (STIR) and, because central banks and governments don't often change their money market base rates, the fluctuations set by the interest rate markets are infrequent. The interest rates depend on the money markets. Forex all-in rates are calculated depending on the interest rate premium, or ...


1

Lagged means past values. The lag can be by as long as you want. If Interest Rates today are 0% and yesterday they were 0.25%. Yesterdays value is what we call the lagged value. Let's say its now 2012 and we are looking at IR in yearly frequency. IR is 0.1%. To lag IR we simply look back at the last value. So what was IR last year? It was 0.3%. Notice how ...


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1) JPY yield curve is currently upward sloping, not inverted... 2) Empirically, an upward sloping yield curve predicts recessions, not an inverted one. See this famous paper http://newyorkfed.org/research/current_issues/ci2-7.pdf



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