PRESENT VALUE OF MONEY :

That value which, if invested at the currently available interest rate until the date of the promised
payment, would result in a future value equal to the sum promised.

PV = C / { 1 + r }^n PV = Present Value of

C = amount of future cash flow
r = discount rate
n = number of years until cash flow is due

If the frequency of discounting is more than once per year, "r" is divided by the number of periods per
year and "n"is multiplied by the same number of periods.

PV = C / { 1 + r/q }^qn q being the number of periods per year

C= 100
r= 10.00% p.a.
q= 2
n= 1

PV = 90.7

PV = ( continuos disc. ) 90.48

DISCOUNT YIELD :

PRICE : P 97.5000
DAYS TO MATURITY : D 90
FACE VALUE : FV 100.0000
DAY COUNT CONV. : RB 365

DISCOUNT YIELD = {FV - P }*{RB} / {FV }*{D}

10.1389% P.A.

IF DISCOUNT YIELD IS = 10.1389%

PRICE = FV*{1 - DY*D/RB}

97.5000
BOND-EQUIVALENT YIELD :

PRICE : P 98.8100
DAYS TO MATURITY : D 84
FACE VALUE : FV 100.0000
DAY COUNT CONV. : RB 365

BOND EQUIVALENT YIELD : {FV - P }*{RB} / {P }*{D}

5.2331% P.A.

IF B.E. YIELD IS : 5.2331%

PRICE = FV/{1 + BEY*D/RB}

98.8100

SPOT RATE OF INTEREST :

Rate of interest used today to discount a single payment due at some time in the future.

zero coupon bond

FORWARD RATES OF INTEREST :

Rates that apply to a financial commitment that begins life some time in the future.

A rate of interest quoted for a 3 month deposit which is to start 3 months hence is a 3 month forward
rate on 3 month deposit.

Continuously compounded forward rates :

FRm,n = [ (Tn * rn) - ( Tm * rm ) ] / [Tn - Tm ]

FRm,n = forward rate for the period between m and n

Tm = maturity of the short period ( m ) transaction expressed as days/365
Tn = maturity of the long period ( n ) transaction expressed as days/365
rm = rate of interest on the short period transaction
rn = rate of interest on the long period transaction

Forward rates from simple interest rates :

FR mvn = { [1 + (rn * n/365)] / [ 1 + (rm * m/365) ] - 1 } * 365/(n - m )

rm = 5.0000%
rn = 5.0000%
m= 90
n= 180

FR = 4.9391%
e date of the promised

mber of periods per

a 3 month forward
Principal 100
Period 90
Rate 10% p.a.
Rate Basis 360

Maturity Value :

Simple Interest : 102.5

Daily Compounded : 102.53

Continuously Compunded : 102.53

Given a maturity value what would be the PV ?

Maturity Value = 100

rate of interest 10% p.a.
Period = 90 days
rate Basis = 360

Simple Interest : 97.56

Daily compunded : 97.53

Continuously Compounded 97.53