Ch04 - Interest Rates Chapter 4 Fundamentals of Futures and...

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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.1 Interest Rates Chapter 4
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.2 Types of Rates z Treasury rates z LIBOR rates z Repo rates
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.3 Measuring Interest Rates z The compounding frequency used for an interest rate is the unit of measurement z The difference between quarterly and annual compounding is analogous to the difference between miles and kilometers
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.4 Continuous Compounding (Page 77) z In the limit as we compound more and more frequently we obtain continuously compounded interest rates z $100 grows to $ 100e RT when invested at a continuously compounded rate R for time T z $100 received at time T discounts to $ 100e - RT at time zero when the continuously compounded discount rate is R
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.5 Conversion Formulas (Page 77) Define R c : continuously compounded rate R m : same rate with compounding m times per year () Rm R m e c m m c =+ =− ln / 1 1
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.6 Zero Rates A zero rate (or spot rate), for maturity T is the rate of interest earned on an investment that provides a payoff only at time T
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.7 Example (Table 4.2, page 79) Maturity (years) Zero Rate (% cont. comp.) 0.5 5.0 1.0 5.8 1.5 6.4 2.0 6.8
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 4.8 Bond Pricing z To calculate the cash price of a bond we
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This note was uploaded on 05/10/2011 for the course MGT D72 taught by Professor Chau during the Spring '11 term at University of Toronto.

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Ch04 - Interest Rates Chapter 4 Fundamentals of Futures and...

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