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Unformatted text preview: discount rate is r = 0 . 05 is: PV = $105 1 . 05 = $100 ◮ We call the discount factor the ratio: d = 1 1 + r Streams of Income ◮ Sequence of future cashflows: P , P 1 , P 2 . ◮ Present Value: P (0) = P + P 1 / (1 + r ) + . . . + P m / (1 + r ) m ◮ P ( m ) = P (1 + r ) m + P 1 (1 + r ) m1 + . . . + P m Forward Rates ◮ Spot Rates: Rates that are quoted (and traded) in the present. ◮ These rates might be quoted for bonds/loans of different maturities ◮ Forward rates relate spot rates of different maturities. ◮ Let the one year spot rate be r 1 and the two year spot rate be r 2 (both in annual terms). Then the forward rate f 1 , 2 is defined as: (1 + r 1 )(1 + r 1 , 2 ) = (1 + r 2 ) 2...
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This note was uploaded on 11/20/2011 for the course ECON 420 taught by Professor Silous during the Spring '11 term at Emory.
 Spring '11
 silous
 Econometrics, Interest Rates

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