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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Two Cash Flows, Many Money Market Rates

Suppose that a money market security can be purchased on January 12th for $64,000. The security matures on March 12th, paying $65,000. To review the money market calculations seen so far, let's calculate the interest rate on the security to the nearest one-tenth of a basis point, given the following quotation methods and day-count conventions:

  • Add-on Rate, Actual/360
  • Add-on Rate, Actual/365
  • Add-on Rate, 30/360
  • Add-on Rate, Actual/370
  • Discount Rate, Actual/360

Note first that interest rate calculations are invariant to scale. That means you will get the same answers if you simply use $64 and $65 for the two cash flows. However, if you work for a major financial institution and are used to dealing with ...

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