Questions tagged [interest]
The interest tag has no usage guidance.
53
questions
0
votes
0answers
11 views
Why does amortizing a balloon payment over the term yield a monthly payment increase % greater than the balloon % being on the backend?
This is really not making sense to me on a conceptual level, but after testing, appears to be the case.
We are borrowing money at 3.00% to fund the leasing of some equipment to a customer.
Lease Term: ...
0
votes
0answers
42 views
How to model fixed-rate loans or mortgages with act/365 but constant payment
My question
I have a question on how to model the cashflows of fixed-rate loans or mortgages.
Let's say the payments are monthly, and the rate remains constant throughout the life of the product; each ...
1
vote
4answers
65 views
corporate bonds - general questions [closed]
Newbie here and not trading IRL but for a school assignment.
I want to buy corporate bonds because they are a safe bet from what I read. I have a few questions though, I hope I will find an answer ...
0
votes
1answer
40 views
Cap/Floor on a SpreadOption grid
I have a spread option data from a broker. The rows are the following :
STK
ATM
-0.5
-0.25
... and the values are forward price ( the strikes used are absolute strike and the value of the raw STK is ...
0
votes
2answers
74 views
Bond Convexity & Interest Rates [closed]
I am having trouble understanding the convexity of bonds and the relationship among bonds with different convexities. Exactly what is convexity and what is a simple way to
For instance, how is it ...
1
vote
0answers
40 views
Swap curve is unsmooth at front end with naive interpolation
I am looking at swap curve building at front end and find it difficult to get a smooth forward curve with a fast generic algorithm. For example, EUR 6m curve has 6m deposit, and then a series of FRAs (...
1
vote
2answers
110 views
Day count methods and actual coupon payments
Assume I have a bond that pays 5% coupon anually on the last day of the year. The day count method used to calculate accrued interest over time is "days actual / 360". The day before the ...
4
votes
1answer
151 views
Swaption PnL approximation/attribution
With a payer swaptions delta and gamma is there a method for approximating pnl for a given move in underlying swap rate? (An equivalent to the Taylor expansion for a vanilla call)
Thanks!
0
votes
1answer
49 views
Properties of difference between continuous and discrete compounding of interest rate [closed]
The relationship between annual discrete and continuous compounding interest rates is given as:
$$1+r_d = e^{r_c}$$
My question is what are the properties of the difference between $r_d$ and $r_c$?
...
-1
votes
1answer
54 views
Why Bond pricing formula is changed? [closed]
When I first learn about finance, a bond with continuous yield was priced via
$$Z = e^{-rT},$$ where $r$ is the yield, $T$ the time to maturity.
But, when I learned about stochastic interest rate ...
1
vote
2answers
123 views
What is the cheaper IR hedge: Futures or IRS?
Let's take the following idea:
Your objective is to hedge interest rate risk. You decide between Futures and IRS:
You can sell bund futures (10Y bond equivalent):
Price 177.70
Theoretical coupon: 6%...
0
votes
1answer
165 views
Simple forward price of a commodity formula
Given the spot price of a commodity C, an annual interest rate r, a time to maturity in years t, and storage and insurance cots to maturity s we can express the forward price (using simple interest) ...
0
votes
1answer
75 views
What are “local” and “foreign” interest rate in this formula? [closed]
I found this formula to find fair value of a forex pair:
FV = Spot Ć e(local interest rateāforeign interest rate) Ć T
Taken for example AUDUSD,
Spot is AUD per USD.
T is the time to maturity of ...
1
vote
1answer
24 views
How to solve for effective interest rate of a government bond on HP 10bll+ financial calculator? [closed]
Price of bond = 100.44
Nominal coupon interest rate (compounded annually) = 1.5%
Duration: 10 years
Face value (what you get back after 10 years, may be poor translation): 100
Spent hours now trying ...
0
votes
1answer
116 views
analytical formula for FV of fixed rate of a IRS [closed]
IRS plain vanilla
- expiry in 5 years
- principal is 1$
- semianual payment
How could the analytical formula be derived for the fair value of the fixed rate (initially no value of the swap)?
0
votes
0answers
78 views
Sharpe Ratio and interest rate
The Sharpe ratio is calculated as the ratio between the return and the volatility.
Now, when I have a trading strategy that requires to be invested sometimes and to be flat other times, I assume 0% ...
1
vote
0answers
60 views
Does Vasicek interest rate model had any derivation that follows from a list of assumptions?
I can't find that anywhere online and It doesn't seems to me that this model originated come from intuition or some human motivation but rather it is coming from computerized curve fitting as all the ...
2
votes
2answers
597 views
OIS, Fed Funds Rate and Working
I'm a bit confused about OIS. Is OIS the overnight interest rate or is it a swap. If OIS is the rate at which banks lend overnight, where does the swap come in? Don't they borrow at a fixed rate?
...
1
vote
3answers
215 views
Can you model the LIBOR rate as a geometric Brownian motion?
i.e. The LIBOR rate is driven in the same way as a stock price in the Black Scholes model.
For example let $R_t$ denote the LIBOR rate at time t.
the stochastic differential equation (sde) would take ...
0
votes
1answer
66 views
Why do most interest rate formulas, and indeed finance in general, add 1 to a rate and then subtract afterwards? [closed]
For example, in the formula that shows the relationship between the nominal and effective interest rate shown below, 1 is first added to in/m and then 1 is subtracted from the result. What is the ...
-1
votes
1answer
683 views
Increasing Annuities [closed]
Olga buys a 5-year increasing annuity for X. Olga will receive 2 at the end of the first month, 4 at the end of the second month, and for each month thereafter the payment increases by 2. The nominal ...
0
votes
1answer
542 views
taylor expansion in compounded interest [closed]
You invest $1, 000$ dollars for $10$ years at a $5$% yearly interest rate. After each year the interest paid is reinvested at the same rate.
(a) Represent the total amount A after ten years in the ...
0
votes
1answer
139 views
How are LIBOR rates beyond 12M arrived at? [closed]
I understand LIBOR rates quoted on a daily basis upto 12 M tenors. But how are rates beyond 12M tenor estimated. I got this question from an interviewer.
0
votes
1answer
488 views
Short-Interest Rates Models - Geometric Brownian Motion?
in a paper of Brennon&Schwartz (1977), they model embedded bond options by using an stochastic interest rate model which follows a geometric Brownian Motion.
Now they claim that this assumption ...
1
vote
1answer
102 views
Variable Loan Interest Question
I have been attempting this question a few times over the past few days but can't seem to make any headway on it. Any help would be greatly appreciated.
A loan of ā¬L was to be repaid over a twenty-...
1
vote
2answers
145 views
How is the spread between the US-10 T-bond and the Fed funds rate determined?
In 2015 the Fed funds rate was 0.24%, while the US Treaury 10-year government bond was 2.24%.
How is the spread determined? Is there a formula to determine the spread of the US-10 T-bond and the Fed ...
4
votes
1answer
5k views
Interest rate implied probability of default
Is there an equation or rule of thumb to determine the probility of default for a loan with a specific interest rate?
Let's say, a bank offers a company a loan with an interest rate of 6%, by which ...
0
votes
1answer
6k views
Calculating the net interest income and net interest margin
The tabel below contains financial statement information from the CBA 2013 annual report.
I am asked to find the Net interest income and net interest margain:
My answers are as follows:
Net ...
1
vote
2answers
36 views
I need a low volatility asset that gives an interest/dividen [closed]
I have some cash that needs to sit on an account for some time (less then a year, where I will withdraw an amount every month).
I need them in a fixed price/low volatility asset that gives an interest ...
7
votes
1answer
590 views
What if: Negative interest on an overdrawn bank account?
Theoretical question:
Consider if a bank account had a -12% yearly interest rate, and an account was currently overdrawn to a balance of -$100.
What would the bank do to the -$100 balance after one ...
2
votes
0answers
415 views
US Rule versus Actuarial Method for calculating interest
I'm trying to understand the difference between the actuarial method and the U.S. Rule for calculating interest. I think the difference is that the actuarial rule adds unpaid interest to the principal ...
3
votes
1answer
1k views
Calibration of 1F Hull White short-rate model to market data
I want to calibrate the Hull White 1 factor short rate model to market data. The main purpose is to simulate interest rate paths, which I will use to calculate the net pv of banking liabilities.
Some ...
2
votes
2answers
351 views
Relationship between interest rate and corporate bond yield?
I have been reading articles on liability driven investing, a technique used to increase the correlation b/w assets and liabilities of a pension plan. It appears that they use AA rated corporate bond ...
1
vote
1answer
179 views
Compound interest calculator solving for time with deposits [closed]
I am attempting to solve a compound interest calculation for time given
Principal = 100
Time(years) = t
Rate(per year) = 8%
Deposit(per month) = 5
Total = 300
I ...
3
votes
3answers
818 views
CIR model and calibration
I am new to quantitative finance.
We know that in the CIR model the short rate can't go negative. My question then concerns calibration of CIR to a ZCB yield curve. Is it (and why?) possible to ...
3
votes
1answer
2k views
Is there any template of hull white one-factor calibration model?
Recently I would like to look for excel template of hull white one-factor calibration model using swaption data for my urgent task? However, it seems that I cannot find suitable one in the web.
...
1
vote
2answers
2k views
Interest Rate Risk - The Greeks
IR Delta and Gamma. Can someone please explain if my understanding is accurate as relates to a 2yr interest rate swap? You are considered to be long Delta in an interest rate swap if you are ...
0
votes
1answer
45 views
Compound and continuous interest in the context of debt
I'm trying to figure out the concepts "compound and continuous interest". This article explains the material very well in the context of a savings account. However, I find it difficult to ...
1
vote
1answer
772 views
Why QuantLib assumes zero rates to discount factor is continuous?
https://github.com/lballabio/QuantLib/blob/0ec43027834220baf0a554d68de79a159a2c5489/ql/termstructures/yield/zeroyieldstructure.hpp
...
3
votes
2answers
85 views
How do we include inflation in our calculations? [closed]
How do we include inflation in our compound interest calculations?
E.g. if we have current principal of 1000$ and the interest rate is 3% after 10 years we have <...
5
votes
1answer
5k views
Central bank interest rates: are they quoted annualized?
After a little research on interest rates of different countries I figured out that they are more complicated than I thought and the meaning of them varies country by country.
For example, the U.S. ...
1
vote
1answer
89 views
Immunization: Whats the best way to hedge my short interest rate exposure?
What's the best way to hedge a portfolio against a rise in rates?
Portfolio: long bonds different maturities.
a) parallel shift
b) convex shift (short and long term rise more than mid term)
How is ...
1
vote
2answers
59 views
Force of Interest Compounding at Annual Rate i
I'm working through some actuarial practice and am lost as to what's going on with the differentiation here (it's been a while since I've had calc):
Derive an expression for $\delta_t$ if ...
2
votes
2answers
124 views
What interest rate should I use for testing the covered interest parity?
I am doing an empirical test of the CIP from the recent financial crisis between Canada and the United States. I am using 1,2,3,6,12 month forwards (monthly data). What interest rates should I use? I ...
1
vote
2answers
348 views
Compound Interest Calculation (Years + Months)
My question is with regards to the calculation of "Compound Interest". I have the formula below where I would get an answer to the total value of the investment over a period of "years".
$A$ = Future ...
2
votes
0answers
48 views
Formal Proof of Immunization Techniqu
Please correct me if I am wrong in understanding the Immunisation Technique behind bond interest rate risk management.
It says that any change in interest rate can be neutralised by reinvesting the ...
1
vote
3answers
273 views
Is an economy where money yields interest able to be sustainable and healthy? If yes, how?
There are two points that concern me
Loans
If someone takes a loan of let's say 1000\$, he has to pay back the money with 5% interest, i. e. 1050\$. But where do the 50\$ come from? They didn't ...
5
votes
2answers
613 views
Intuition behind interest rate models
I am modelling the 3M yield of US Treasuries using an ARMA/ GARCH approach. Most interest rate models (e.g. Vasicek) describe the process as follows:
$r_{t}-r_{t-1} = some ARMA+ \epsilon_t $
...
1
vote
1answer
64 views
“Equivalent” data sets despite different numbers
Are the historical data sets of short term treasury bill rates considered the same as the historical data sets of savings account interest rates because by definition they are both risk free rates of ...
1
vote
3answers
981 views
How often do banks update forward points?
My understanding is that forward rates are calculated by comparing interbank interest rates of the 2 currencies for a currency pair, with the points being the difference between spot and the forward ...
