FIN4014 Fixed Income GuoT1

FIN4014 Fixed Income GuoT1 - FIN4014 Fixed Income...

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FIN4014 Fixed Income Instructor: Hui Guo 8/21/2016 1 Hui Guo FIN4014 Fixed Income
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Pricing of Bonds 8/21/2016 2 Fixed Income Hui Guo
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Time Value of Money Future value of $P 0 invested at an interest rate r per period 3 n P n =P 0 (1+r) n Period Future Values 0 P 0 1 P 1 =P 0 (1+r) 2 P 2 =P 1 (1+r)=P 0 (1+r) 2 ... 8/21/2016 Fixed Income Hui Guo
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Time Value of Money Example: $100 invested for 5 years at annual rate 10% Case 1 Pay interests every year: n=5 and r=10% Answer: $100(1+10%) 5 =$161.05 Case 2 Pay interests every 6 months: n=10 and r=10%/2=5% Answer: $100(1+5%) 10 =$162.89 Interests are reinvested in case 2 more frequently 4 8/21/2016 Fixed Income Hui Guo
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Future Value of an Annuity Annuity: Same amount of money invested periodically (end of period) 5 n-1 A A(1+r) n A A 8/21/2016 Fixed Income Hui Guo Period Amount Invested Value at Period n 1 A A(1+r) n-1 n-2 A A(1+r) 2
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