Discounting and Bond Notation and Formulas

Notation

r R i y rt fn,t rr π m T N cn Vn

= = = = = = = = = = = = =

Effective annual interest rate (EAR) Annual percentage rate (APR) Effective periodic interest rate (= R/m) Yield to maturity (YTM) t-period spot rate t-period forward rate beginning in period n Real interest rate Inflation rate Number of compounding periods per year Total number of years Total number of periods (= T × m) Arbitrary cash flow in period n Value of a security at time period n (n = 0 =⇒ today )

Formulas
V0 =
cN (1+i)N

Present Value of a single cash flow Future Value of a single cash flow Present value of a growing perpetuity

VN = c0 × (1 + i)N V0 = V0 = VN =
c1 i−g c1 i−g c1 i−g

· 1− · 1−

1+g N 1+i 1+g N 1+i

Present value of a growing annuity (1 + i)N Future value of a growing annuity Spot and forward rate relation Effective interest rate and APR relation /B Macaulay Duration of a bond with price B Change in Bond price due to ǫ change in APR (R) Real and nominal interest rate relation

(1 + rn+t )n+t = (1 + rn )n (1 + fn,t )t 1+r = 1+ D=
N n n=1 m R m m

·

cn (1+y/m)n

D % Change in Price ≈ − 1+R/m × ǫ

(1 + rr) = (1 + R)/(1 + π) ≈ r − π

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