Questions tagged [interest]
The interest tag has no usage guidance.
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3answers
85 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
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1answer
56 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 ...
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0answers
207 views
finding OIS Swap data
Relatively new to SE Quant after quite a bit of lurking, I am looking to make an OIS curve but am having trouble finding OIS swap data that is free. From what i have found online bloomberg used to ...
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0answers
17 views
Interest risk and credit risk calculations for fung and Hsieh model
I'm running the Fung and Hsieh multifactor model (2004) for European data. I have used the ln returns based on monthly prices (in Euros) from datastream, and I had a few concerns:
1. for interest ...
0
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0answers
425 views
What does it mean that a swaption is atm?
This is a relatively short question: If a swaption with option tenor $S$ and swap tenor $T$ is said to be atm, does that mean that the strike of the swaption is equal to the currently (we ar at time $...
-1
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1answer
122 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
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1answer
192 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
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1answer
103 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
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1answer
255 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 ...
0
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0answers
102 views
Calculating Compound Interest on a Leveraged Account
Let's assume I have the following setup in a trading account with the assumed yearly returns:
Principal = $25,000
Yearly Return = 20%
Account Leverage: 5x
Timeframe: 5 Years
To solve for the ...
1
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1answer
87 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-...
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0answers
74 views
Difference between Zero-Bond-Curves and Term-Structure Models?
I'm trying to model a fixed-income securities (in specifc a loan with prepayment) but I got confused in some general aspects.
So if I want to model a simple loan, I could just use a simple present ...
0
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2answers
123 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 ...
3
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1answer
2k 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
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1answer
5k 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
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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 ...
6
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1answer
418 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
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0answers
191 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
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1answer
732 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
302 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
102 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 ...
4
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3answers
606 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
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1answer
1k 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.
...
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2answers
496 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
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1answer
36 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 transfer my ...
1
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1answer
418 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
76 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 <...
6
votes
1answer
3k 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
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1answer
82 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
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2answers
53 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
110 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 ...
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2answers
92 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
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0answers
47 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
263 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
520 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 $
...
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1answer
63 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
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3answers
698 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 ...
3
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1answer
1k views
What is lagged interest rate?
I am trying to reproduce a plot in "Statistics and Data engineering for Financial Engineering" by D. Ruppert. The author uses the risk free returns data available in the Ecdat package in R. ...
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0answers
60 views
Should portfolio be optimized by marking to the future than marking to market (excluding currencies)?
Observing the negative interest bonds in Switzerland, Denmark, GErmany the value of higher presently (credit-free) outgoing cash flows seems less important than the value of lower future (credit-free) ...
2
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1answer
377 views
Is inverted Japanese style curve persistent when negative rates are real / market - observed?
Are the inverted (Japanese style) governmental yield curves being a sign a recession/credit risk or should they be modelled as being due to a lack of liquidity? (...with such curves evolving into a ...
