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PART I PART II

Relationships between the annual quantities of the exponential law

law: For every t ≤ T ≤ s,

1 1

1

1

s−t

1

s−T

v= , δ = log(1 + i) , d=1−v . i(t, s) = − 1 , i(t, T, s) = −1 ,

1+i v(t, s) v(t, T, s)

log v(t, s) log v(t, T, s)

Discount factor h(t, s) = − , h(t, T, s) = − ,

s−t s−T

i annual compound interest rate, t and s in years Rs Rs

v(t, s) = e− t δ(t,u) du , v(t, T, s) = e− T δ(t,u) du ,

v(t, s) = (1 + i)−(s−t)

∂

δ(t, s) = − log v(t, s) .

∂s

Equivalent rates

q is the exchange factor in the time unit of measures Commercial discount law

1 Fixed k > 0, for every t ≤ s with s − t < 1/k,

i0 = (1 + i)1/q − 1 , δ0 = δ ,

q v(t, s) = 1 − (s − t)k

v 0 = v 1/q , d0 = 1 − (1 − d)1/q .

Duration of an annuity under a flat term structure

Linear law Given an immediate annuity r with annual constant

Discount factor instalments, duration m ≥ 0 and an exponential law:

i annual simple interest rate, t and s in years dm i 1+i m

D(0, r) = = − ,

v(t, s) = [1 + (s − t)i]−1 am i i (1 + i)m − 1

1 − vm

v

dm i = − mv m .

1−v 1−v

Equivalent interest rates

q is the exchange factor in the unit of measure of time:

Swap Interest rate

1 A swap interest rate for m years with annual fixed rate:

i0 = i .

q

1 − v(t, t + m)

isw (t; m) = Pm .

k=1 v(t, t + k)

Annuties

Present value of an annuity and of a perpetuity with constant

instalments R = 1 according to the exponential law with

annual interest rate i > 0. n ≥ 0 indicates the duration of PART III

the annuity.

1 − (1 + i)−n 1 Portfolio Allocation

an i = , a∞ i = ,

i i Minimum variance allocation of a portfolio composed by two

n

1 − (1 − d) 1 assets.

ä n i = (1+i)a n i = , ä ∞ i = (1+i)a ∞ i = . √

d d V2 − ρ V1 V2

w1∗ = √ .

V1 + V2 − 2ρ V1 V2

Amortizations w2∗ = 1 − w1∗ .

Amortization at periodic compound interest rate i > 0 of

a loan S > 0, duration n periods. For each k, Rk is the

instalment paid in that period, Ck the amortization quota,

Ik the interest quota, Mk = Dk the residual debt value.

French amortization (Rk = R constant)

S

R= , Ck = Rv n−k+1 ,

an i

Ik = R 1 − v n−k+1 ,

Mk = Dk = Ra n−k i .

S

Rk = C[1 + i(n − k + 1)] , C=

,

n

Ik = iC(n − k + 1) , Mk = Dk = C(n − k) .

v. 6 aprile 2017

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