Comments For MSF 501 Lesson 1
1. Lesson 1 consists of the material in Ten Little Quants called Linear Data. The
material covers linear representation of data, simple interest and simple discount,
forward price, option value at expiration, least squares li

Project 1 Copy 3
Problem 1: Bertha is a salesperson looking for a job. Betty and Bob Brokerage Co. offer
her a (guarantee) of $30,000 a year plus 5% of her yearly sales in dollars. Cosmos
Brokerage Co. offers her 8% of her yearly sales in dollars (with no

Announcements on Bonds
1. Can you short a cash bond? Professor Keith Black says that you can short a cash
bond. However, the ability to do so is impacted by the issue size and liquidity.
While Treasuries are easier to short, less liquid junk and convertib

Some Comments On Compound Interest
Compound interest differs from simple interest in that simple interest is computed
on a principal that never changes, while compound interest is computed on the principal
plus past interest. For this reason, compound int

PROJECT 4 Copy 3
Problem 1: Bob borrows some money from Betty. Every 6 months for 2 years he will
pay her coupons of $900, $1200, $800, and $300 in that order and a maturity payment of
$10,000 at the end of 2 years.
a. How much should she give him now to

Money
From Wikipedia, the free encyclopedia
Jump to: navigation, search
For other uses, see Money (disambiguation).
An example of Money. More specifically, Brazilian Real bills and coins.
In economics, there are various definitions for money, though it is

Comments For MSF 501 Lesson 4
1. Lesson 4 Parts 1 and 2 consists of the material in Ten Little Quants, labeled The
Bond Equation. The material covers bond pricing and yield to maturity, Zero
Coupon Bonds, Salesmans Rule, pricing between coupon periods, ac

Bonus Problems On The Option Conversion
Problem 1: Betty and Bob buy one October 50 conversion by buying 100 shares of
stock @ $51 and selling one October 50 call @$5 and buying one October 50 put @$3.
a. As per table express the algebraic value, W, and t

Hi Students:
Technology and Lesson 3
The time value of money is further explored in Lesson 3. Annuities and
Mortgages are covered. Theory is explained in Day Of The Quants Sections 22, 23, and
24.
Excel has some wonderful tools that give a technological s

Project 3 Copy 3
Problem 1: Betty deposits an amount now and withdraws another amount after 9 months.
2 years after the initial deposit her account balance is $7,096.529. Bob deposits twice
what Betty did, now and withdraws after 15 months 300% of what sh

More Cost to Carry
The cost to carry equation relates the forward price of a forward contract with the spot
price(current price of the underlying) and the risk-free interest rate over the term of the
contract and the term of the contract and benefits accr

Technology and Lesson 4
In Lesson 4 the discussion turns to the time value of money as per bonds. The
price of a bond is the sum of the present values of its cash flows.
Excel has tools for dealing with the associated bond concepts. Again use Paste
Functi

Total Return and Terminal Wealth of a Bond
As we have stated, if P is the selling price of a bond with term equal to n periods
and maturity value of M and periodic yield to maturity of i and reinvestment rate of
coupons equal to yield to maturity then
P (

The Need for Duration
The price of a bond varies with yield to maturity, i.e. when interest rates change
the price of a bond changes. For a given change in rates, Di , what can we say about the
P - P0
simple percent change,
?
P0
All other things being equ

Bond Pricing Summary
Here is a summary of some of the important concepts associated with bond
pricing.
1. The price (value) of a bond is the sum of the present values of its cash flows.
There are several formulae that express this basic idea. Some are mor

Some Thoughts
Now that we have gone through several weeks of the course some of these
thoughts may have occurred to you:
1. MSF 501 is relentless. There is no time to pause and catch ones mental breath.
Each week involves a quiz, a project, technology, an

More on Bonds Accrued Interest
A bond may be purchased in-between coupon payments. The Price (value) of the
bond is the sum of the present values of the remaining cash flows. There are various
formulae for computing this number which is called the full or

Macaulay Duration A Balance Point
Consider a collection of 10 numbers as follows:
2, 1, 4, 2, 2, 3, 5, 3, 1, 2
So, there are two 1s, four 2s, two 3s, one 4, and one 5. A graph of frequency (how many) versus
number looks like
4
3
2
1
1
2
3
4
5
The above ba

Macaulay Duration A Closed Form
The Macaulay Duration, DM , of a collection of cash flows, CF j , is a weighted
average (mean) of times (periods), j, at which the cash flows occur, where the weights are
the percent of the present value of the cash flow wi

With millions of bonds
outstanding, newspaper
listings dont cover
every single issue. But
only a small fraction of
outstanding bonds
trade on any day, so
listings of representative
prices provides
investors with sufficient
benchmark information.
12 AA Jou

More on Bonds: Price versus Time
The price (value) of a bond between coupon dates is just the sum of the present
values of the remaining coupons, i.e. nothing new has been added to the concept. There
are various ways of looking at the situation whence dif

More Continuous Interest
The continuous rate of return has special characteristics that make it very useful in
theoretical work. Consider a time line analysis as per:
Pe r1n1
P
Per1n1 er2n2
n1
0
n1 +n2
periods
If r is the equivalent continuous rate of ret

Logarithms and the Real World
Logarithms are used in measuring many physical quantities. The scale that is
used to measure earthquakes, the Richter Scale, involves a logarithm. Likewise
the scale that is used to measure the loudness of sound in decibels i

History of Mortgages
You may think mortgages have been around for hundreds of years - after all, how could
anyone ever afford to pay for a house outright? It was only in the 1930s, however, that
mortgages actually got their start. And, it wasn't banks tha

Announcement on Quadratic and Exponential Functions
1. Quadratic Functions: A function is quadratic i.e.
y =ax 2 +bx +c
if and only if equal changes in x (the independent variable) produce values of y
such that the second differences i.e. the differences

Equivalent Rates A Discussion
Definition: Two (compound) rates with their compounding periods are equivalent if and
only if starting with the same amount of money (initial account value) they result in the
same (terminal) account value in the same amount

Announcement on Effective and Continuous Rates
Be careful! Dont confuse the effective and continuous rates.
The effective rate is N=1 i.e. as per
A =P (1 +Re )T
The continuous rate is as per
A =Pe RcT
Notice that the equivalent effective rate will always

Why Fit Lines And Curves?
1.We want a concise way of expressing the
relationship between variables.
2.We may wish to use the relationship for
forecasting results.
3.We may wish to assess the reliability of
predictions by looking at the scatter of
observed

Total Dollars and Options
Stocks are priced in units of dollars per share. Suppose that you wish to purchase
600 shares of XYZ stock. The quoted price (on the NYSE or some other exchange) may
be, for example, $57 per share. Hence the amount of money that

Announcements on Time, Rate, and Algebraic Value
1. Time Calculations: Be careful! Remember that q months equal q/12 years.
So 3 months = 3/12 = .25 years and not 3/10 year.
So 42 months = 42/12 = 3.5 years and not 4.2 years or 3 + 6/10 years.
Some studen