Appendix 3. A summary of calculation procedures
Notation
The following general notation is used throughout these formulas, unless something different is specifically mentioned:
D | = | discount rate |
FV | = | future value, or future cashflow |
i | = | interest rate or yield per annum |
n | = | number of times per year an interest payment is made |
N | = | number of years or number of coupon periods |
P | = | price (dirty price for a bond) |
PV | = | present value, or cashflow now |
r | = | continuously compounded interest rate |
R | = | coupon rate paid on a security |
year | = | number of days in the conventional year |
zk | = | zero-coupon yield for k years |
Financial arithmetic basics (Chapter 1)
Effective and nominal rates
If the interest rate with n payments per year is i, the effective rate (equivalent annual rate) i* is:
Similarly:
Continuously ...
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