Questions tagged [interest]

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Libor Market Model

I try to simulate forward rates with the Libor Market Model (LMM). Unfortunately, I just have data for normal vols instead of lognormal vols which are assumed in the LMM. Is there a way I can adjust ...
Marc157's user avatar
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1 answer
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Forward Rate Volatility Calculation - Caps for Libor Market Model

I am trying to calculate the forward rate volatilities from cap volatilities using Rebonato`s volatility model. Unfortunately, my approach always results in unrealistic forward rate vols. Furthermore, ...
Marc157's user avatar
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111 views

Python Quantlib G2 calibration with negative interest

I am currently calibrating the G2++ in Python with Quantlib in negative interest rate environments with cap volatilities. Unfortunately, this does not work as intended and I get error messages:...
Marc157's user avatar
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1 vote
1 answer
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Determining fair interest rate for an unsecured loan with a non-refund clause

A startup company is doing a share transfer between a new co-founder and existing co-founders. The new co-founder will purchase the shares from the existing co-founders through a loan agreement ...
Mikael Törnwall's user avatar
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23 views

Defining the terms "old interest" and "new interest" (across a variety of disciplines)

This is a bit of a vocabulary / concept tackle (these two, tackling each other). My question is about this. How would a financial analyst define and extrapolate and make the reader (or, user) envision,...
Joselin Jocklingson's user avatar
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0 answers
35 views

Shape of spot curve Volatility in Hull White 1 factor

The formula for the volatility of interest rates under Hull white model is It appears to be an increasing function of tenor. However, the forward rate volatility curve is downward sloping with ...
user6408904's user avatar
-1 votes
2 answers
69 views

How should we interpret r_c in continuously compounded interest? [closed]

I'm just curious there is any useful "meaning" or interpretation we can assign directly to $r_c$. Of course one can directly calculate the non-continuously compounded interest from $r_c$, ...
uncreative's user avatar
1 vote
2 answers
361 views

Interest rate risk of a bond as a function of the coupon

This SEC document claims that increasing the ocupon on a bond decreases the interest rate risk (bottom of page 3): And the Finra SIE exam states the same also. I cannot understand the logic behind ...
will's user avatar
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How does Bloomberg calculate interest rate for a government bond?

I am working in some related field and working on the data, I am curious that how did Bloomberg obtain the interest rate of a particular currency. In particular, one of my workings is on the HK ...
Preston Lui's user avatar
0 votes
1 answer
91 views

Valuation discount rate using risk free interest rate versus inflation rate

Imagine a world where, for a given time period, the expected inflation rate is 10%, but the nominal risk free interest rate over the same period is 5%. Should my starting point - from a discounted ...
Bryan Franco's user avatar
1 vote
0 answers
95 views

Which Model Should I Use for Pricing USD Interest Rate Caps (7, 10, 30 year maturities) on 1Month Rates?

I am trying to price USD interest rate caps on 1M rates (e.g., LIBOR, SOFR, etc.). The caps are designed to limit the exposure on non-callable USD Pay Float / Receive fixed positions in interest rate ...
ExcelRates's user avatar
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177 views

Annualizing the pay frequency of underlying swaps when bootstrapping the zero curve?

Say I'm looking to bootstrap two zero curves based on two swap curves with different underlying currencies and, consequently, two different pay structures in the swap contracts. For example, say I ...
QVC's user avatar
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69 views

Why do we get a higher yield when we pay the interest at the end?(bonds)

I have an example where I show that if you pay the tax at the end of the bond period, the yield after tax is higher, but I am wondering if it is possible to give an explanation as to why it is like ...
user394334's user avatar
0 votes
1 answer
1k views

Is it possible to price a plain vanilla interest rate swap in Python and simulate the price using Hull White 1 Factor Model simultaneously?

I am trying to price plain vanilla interest rate swap (IRS) using QuantLib. What I am trying to do is to generate a path of simulated IRS price by simulating the interest rates using HW 1 Factor model....
Desi_Quant's user avatar
1 vote
0 answers
54 views

Time step in Hull white mean reverting model

Specially for mean reverting processes for interest rate simulation. Is it acceptable to directly simulate the paths at say 1 month horizon without stepping through time? Please advice.
repomath's user avatar
-2 votes
1 answer
138 views

Why continuously compounded interest a standard in finance? [closed]

Why is the "continuously compounded interest" the standard in finance? Many finance textbooks use the formula e^rt without justification. The assumption that the interest frequency is ...
Eiffelbear's user avatar
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1 answer
351 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 ...
Pythonista anonymous's user avatar
1 vote
4 answers
91 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 ...
uma guma's user avatar
0 votes
1 answer
184 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 ...
Adel Chakir's user avatar
0 votes
2 answers
260 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 ...
SylvesterAussie's user avatar
1 vote
0 answers
111 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 (...
vicpmath's user avatar
1 vote
3 answers
745 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 ...
GrafZ4hl's user avatar
5 votes
1 answer
783 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!
Laralander's user avatar
0 votes
1 answer
358 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 $r_c$? ...
emcor's user avatar
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-1 votes
1 answer
120 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 ...
user46871's user avatar
1 vote
2 answers
264 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%...
DataAdventurer's user avatar
0 votes
1 answer
387 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) ...
roz's user avatar
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1 answer
84 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 × e(local interest rate−foreign interest rate) × T Taken for example AUDUSD, Spot is AUD per USD. T is the time to maturity of ...
Gio's user avatar
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1 vote
1 answer
31 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 ...
Julian Nikolay Krogh-Fredrikse's user avatar
0 votes
1 answer
140 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)?
smartquant's user avatar
0 votes
0 answers
149 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% ...
Chris H.'s user avatar
1 vote
0 answers
92 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 ...
Victor's user avatar
  • 285
2 votes
2 answers
874 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? ...
Shyam's user avatar
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1 vote
3 answers
336 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 ...
Jesus's user avatar
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0 votes
1 answer
380 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 ...
od320's user avatar
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-1 votes
1 answer
943 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 ...
uytt's user avatar
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1 vote
1 answer
856 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 ...
thisisme's user avatar
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0 votes
1 answer
147 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.
Praveen's user avatar
0 votes
1 answer
681 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 ...
Kosta S.'s user avatar
  • 209
1 vote
1 answer
114 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 €L was to be repaid over a twenty-...
John Donaghue's user avatar
1 vote
3 answers
244 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 ...
Matthias's user avatar
  • 226
5 votes
1 answer
7k 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 ...
Matthias's user avatar
  • 226
0 votes
1 answer
7k 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 ...
user24093's user avatar
1 vote
2 answers
37 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 ...
TwentyYes's user avatar
7 votes
1 answer
639 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 ...
AAron's user avatar
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2 votes
0 answers
591 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 ...
WebUserLearner's user avatar
4 votes
1 answer
2k 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 ...
quantMartingale's user avatar
2 votes
2 answers
403 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 ...
JungleDiff's user avatar
1 vote
1 answer
261 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 ...
joel1618's user avatar
  • 113
3 votes
3 answers
1k 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 ...
A.Boh's user avatar
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