Appendix A of MATH4512 Lecture Note 1

When calculating duration and convexity of an asset, one needs to calculate the following summations:
𝑛 𝑛 𝑛
1 𝑘 𝑘2
∑ , ∑ , ∑
(1 + 𝑖)𝑘 (1 + 𝑖)𝑘 (1 + 𝑖)𝑘
𝑘=1 𝑘=1 𝑘=1
In this appendix, we shall present the mathematical derivations of these formula.
1
A. Derivation of ∑𝑛𝑘=1 (1+𝑖)𝑘
We let
𝑛
1 1 1 1
𝑆=∑ = + +⋯+ … … (1)
(1 + 𝑖) 𝑘 1 + 𝑖 (1 + 𝑖) 2 (1 + 𝑖)𝑛
𝑘=1
Multiplying both sides by (1 + 𝑖), we get
𝑛
1 1 1
(1 + 𝑖)𝑆 = ∑ =1+ +⋯+ … … (2)
(1 + 𝑖) 𝑘−1 1+𝑖 (1 + 𝑖)𝑛−1
𝑘=1
Next, we subtract the equation (1) from equation (2), we have
1 1 1
(1 + 𝑖)𝑆 = 1 + + +⋯+
1 + 𝑖 (1 + 𝑖) 2 (1 + 𝑖)𝑛−1
1 1 1 1
−) 𝑆= + + ⋯ + +
1 + 𝑖 (1 + 𝑖)2 (1 + 𝑖)𝑛−1 (1 + 𝑖)𝑛
-------------------------------------------------------------------------------------------------
1
𝑖𝑆 = 1 −
(1 + 𝑖)𝑛
Solving the equation, we get
𝑛
1 1 − (1 + 𝑖)−𝑛
𝑆=∑ = .
(1 + 𝑖)𝑘 𝑖
𝑘=1

𝑘
B. Derivation of ∑𝑛𝑘=1 (1+𝑖)𝑘
We let
𝑛
𝑘 1 2 𝑛
𝑆=∑ = + +⋯+ … … (3)
(1 + 𝑖) 𝑘 1 + 𝑖 (1 + 𝑖) 2 (1 + 𝑖)𝑛
𝑘=1
Multiplying both sides by (1 + 𝑖), we get
𝑛
𝑘 2 𝑛
(1 + 𝑖)𝑆 = ∑ =1+ +⋯+ … … (4)
(1 + 𝑖) 𝑘−1 1+𝑖 (1 + 𝑖)𝑛−1
𝑘=1
Next, we subtract the equation (3) from equation (4), we have
2 3 𝑛
(1 + 𝑖)𝑆 = 1 + + +⋯+
1 + 𝑖 (1 + 𝑖) 2 (1 + 𝑖)𝑛−1
1 2 𝑛−1 𝑛
−) 𝑆= + + ⋯+ +
1 + 𝑖 (1 + 𝑖) 2 (1 + 𝑖) 𝑛−1 (1 + 𝑖)𝑛
-------------------------------------------------------------------------------------------------
1 1 1 𝑛
𝑖𝑆 = 1 + + + ⋯+ −
1 + 𝑖 (1 + 𝑖)
⏟ 2 (1 + 𝑖) 𝑛−1 (1 + 𝑖)𝑛
1 1−(1+𝑖)−(𝑛−1)
=∑𝑛−1
𝑘=1 =
(1+𝑖)𝑘 𝑖
Solving the equation, we get
𝑛
𝑘 1 1 − (1 + 𝑖)−(𝑛−1) 𝑛 1 + 𝑖 − (1 + 𝑖)−(𝑛−1) 𝑛
𝑆=∑ = (1 + − ) = − .
(1 + 𝑖)𝑘 𝑖 𝑖 (1 + 𝑖)𝑛 𝑖2 𝑖(1 + 𝑖)𝑛
𝑘=1

𝑘2
C. Derivation of ∑𝑛𝑘=1 (1+𝑖)𝑘
We let
𝑛
𝑘2 12 22 𝑛2
𝑆=∑ = + +⋯+ … … (5)
(1 + 𝑖)𝑘 1 + 𝑖 (1 + 𝑖)2 (1 + 𝑖)𝑛
𝑘=1
Multiplying both sides by (1 + 𝑖), we get
𝑛
𝑘 2
22 𝑛2
(1 + 𝑖)𝑆 = ∑ = 1 + + ⋯ + … … (6)
(1 + 𝑖)𝑘−1 1+𝑖 (1 + 𝑖)𝑛−1
𝑘=1
Next, we subtract the equation (5) from equation (6), we have
22 32 𝑛2
(1 + 𝑖)𝑆 = 12 + + + ⋯ +
1 + 𝑖 (1 + 𝑖)2 (1 + 𝑖)𝑛−1
12 22 (𝑛 − 1)2 𝑛2
−) 𝑆= + + ⋯ + +
1 + 𝑖 (1 + 𝑖)2 (1 + 𝑖)𝑛−1 (1 + 𝑖)𝑛
-------------------------------------------------------------------------------------------------
3 5 2𝑛 − 1 𝑛2
𝑖𝑆 = 1 + + + ⋯ + −
1 + 𝑖 (1 + 𝑖)2 (1 + 𝑖)𝑛−1 (1 + 𝑖)𝑛
(*Note: 𝑛2 − (𝑛 − 1)2 = 2𝑛 − 1)
By rearranging the terms, we deduce that

1 3 5 2𝑛 − 1 2𝑛 + 1 2𝑛 + 1 𝑛2
𝑆 = [1 + + + ⋯ + + − − ]
𝑖 ⏟+ 𝑖 (1 + 𝑖)2
1 (1 + 𝑖)𝑛−1 (1 + 𝑖)𝑛 (1 + 𝑖)𝑛 (1 + 𝑖)𝑛
𝐶𝑜𝑚𝑏𝑖𝑛𝑒 𝑡ℎ𝑒𝑠𝑒 𝑡𝑒𝑟𝑚𝑠
𝑛
2
1 𝑛 + 2𝑛 + 1 2𝑘 + 1
= (1 − +∑ )
𝑖 (1 + 𝑖) 𝑛 (1 + 𝑖)𝑘
𝑘=1
𝑛 𝑛
2
1 𝑛 + 2𝑛 + 1 𝑘 1
= (1 − +2∑ +∑ ).
𝑖 (1 + 𝑖) 𝑛 (1 + 𝑖) 𝑘 (1 + 𝑖)𝑘
𝑘=1 𝑘=1
(*Note: The last two summations can be computed using the formula established earlier)

Remark:
𝑘3 𝑘4
In fact, one can use the similar trick and establish the formula ∑𝑛𝑘=1 (1+𝑖)𝑘 , ∑𝑛𝑘=1 (1+𝑖)𝑘 , 𝑒𝑡𝑐.