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1 answer
68 views

Easy interest rate question, but coursera marked it wrong [closed]

Here is an easy interest rate question from one of the finance courses on coursera: If the present value of \$400 paid one year from now is \$320, what is the one-year interest rate? (Note: this ...
1 vote
0 answers
25 views

Decomposition of Step-up swaps

is there a general procedure to decompose a fixed-floating interest rate swap, where the fixed rate changes period-to-period, into a basket of co-initial swaps, each with a different fixed rate? For ...
0 votes
0 answers
57 views

Repo Partial termination cashflows

Let's take the example where I buy a Repo with a notional of 10000 EUR and I agree with my counterparty to partially terminate the deal, decreasing the notional to 8000 EUR instead of 10000 EUR. The ...
0 votes
0 answers
49 views

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 ...
0 votes
1 answer
54 views

Forward Rate Volatility Calculation - Caps for Libor Market Model [duplicate]

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, ...
0 votes
1 answer
135 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:...
1 vote
1 answer
56 views

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 ...
0 votes
0 answers
24 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,...
1 vote
3 answers
842 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 ...
0 votes
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 ...
1 vote
3 answers
247 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 ...
6 votes
1 answer
6k 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 votes
2 answers
74 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 $r_c$, ...
1 vote
2 answers
365 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 ...
0 votes
0 answers
76 views

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 ...
0 votes
1 answer
96 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 ...
0 votes
1 answer
208 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 ...
5 votes
1 answer
849 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!
1 vote
0 answers
109 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 ...
0 votes
0 answers
185 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 ...
0 votes
0 answers
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 ...
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....
1 vote
0 answers
55 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.
-2 votes
1 answer
147 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 ...
0 votes
1 answer
395 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
4 answers
96 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
2 answers
282 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
0 answers
117 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 (...
0 votes
1 answer
412 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
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 ...
1 vote
2 answers
284 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
1 answer
410 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
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 ...
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 ...
0 votes
1 answer
141 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
0 answers
155 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
0 answers
95 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
2 answers
881 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
3 answers
342 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
1 answer
429 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 ...
3 votes
2 answers
5k 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 ...
-1 votes
1 answer
955 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 ...
1 vote
2 answers
67 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 ...
1 vote
1 answer
876 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
1 answer
148 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
1 answer
702 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
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-...
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 ...
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 ...
1 vote
2 answers
38 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 ...