# Tag Info

Accepted

### Interest rate implied probability of default

You can use the "credit triangle" which states that the (annualised) credit spread $S$ equals the annualised probability of default $p$ times the loss given default LGD which equals par minus the ...
• 2,147

### Can you model the LIBOR rate as a geometric Brownian motion?

It is not reasonable because rates display a stationarity but brownian motion is not stationary. The variance of libor at a future time $t>0$ conditional on the value at time $t=0$ does not scale ...
• 2,187

• 311

### OIS, Fed Funds Rate and Working

OIS (Overnight Index Swap) is a swap, that is a derivative, with a specified tenor (such as 37 days). It represents a "bet" as to what the geometric average overnight rate (FF rate in the United ...
• 9,372

### What is the cheaper IR hedge: Futures or IRS?

I'll start by saying that if you found a cheaper way to hedge exactly the same risk, that would be arbitrage (assuming transaction costs don't invalidade the opposite position) Without going into ...
• 5,815

### How to model fixed-rate loans or mortgages with act/365 but constant payment

First and foremost, your premise that "most consumer loans/mortgages calculate interest daily based on act/365" is incorrect. At least in the United States, most single-family residential ...
• 523

### Why continuously compounded interest a standard in finance?

It's a Duplicate which was in turn closed because it is a basic financial question. Reading it will "back" up how they are related: You asked rubikscube09 if he has a toy example to back up ...
• 8,739

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

For a plain vanilla swap we can define the annuity $$A(t)\equiv\sum_{i=0}^{N-1} \tau_i P(t,T_{i+1})$$ and write the swap rate as $$S(t)\equiv\frac{P(t,T_0)-P(t,T_N)}{A(t)}$$ such that the swap price ...
• 845
Accepted

### How should we interpret r_c in continuously compounded interest?

I would add to the previous answer that it simplifies the maths around working with a large number (i.e. tending to infinity) of timesteps when modelling options and other derivatives.
• 166
1 vote
Accepted

### Simple forward price of a commodity formula

Like Chris said you should probably check out the John Hull book, that explains these concepts very well in the early chapters (Ch 4 and 5 of the 10th Ed.). According to John Hull (he uses ...
• 5,815
1 vote
Accepted

### How to solve for effective interest rate of a government bond on HP 10bll+ financial calculator?

I assume you are looking for the Yield to Maturity Press [C ALL] to remove any result already stored. You have to use the top 5 buttons on the calculator to enter the maturity, the price (as a ...
• 9,372
1 vote

### Why do most interest rate formulas, and indeed finance in general, add 1 to a rate and then subtract afterwards?

The formula is multiplicative because interests are compounded (re-invested). Let's say you have 10% interest on a 1 USD deposit, compounded (calculated and paid) twice a year. That would be 5 cents ...
• 2,908
1 vote

### How is the spread between the US-10 T-bond and the Fed funds rate determined?

The US-10 T bond yield is not a FUNCTION( in the mathematical sense) of the fed funds rate. At two different times the US-10T bond rates can be exactly the same while, at the same exact times, the ...
• 141

Only top scored, non community-wiki answers of a minimum length are eligible