Interest rate risk modeling by Sanjay K. Nawalkha

By Sanjay K. Nawalkha

The definitive consultant to fastened source of revenue valuation and hazard research

The Trilogy in mounted source of revenue Valuation and probability research comprehensively covers the main definitive paintings on rate of interest possibility, time period constitution research, and credits hazard. the 1st ebook on rate of interest hazard modeling examines nearly each recognized IRR version used for pricing and hazard research of assorted fastened source of revenue securities and their derivatives. The significant other CD-ROM include quite a few formulation and programming instruments that permit readers to higher version hazard and price mounted source of revenue securities. This entire source offers readers with the hands-on info and software program had to reach this monetary area.

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1, and H is the planning horizon. , Q = 3 to 5) have 9 Key Rate Duration Models shown to almost perfectly immunize against the risk of nonparallel yield curve shifts. Since the shifts in the height, slope, curvature, and other parameters of the term structure of interest rate shifts are generally larger at the shorter end of the maturity spectrum, it is possible that an alternative set of duration measures that are linear in g(t), g(t)2, g(t)3, and so on, and which put relatively more weight at the shorter end of the maturity spectrum due to the specific choice of the function g(t), may provide enhanced immunization performance.

0598505 20 BOND PRICE, DURATION, AND CONVEXITY The present value of the loan can be computed in two different ways. 005, the loan’s present value is given as: 100 100 100 + + ... 0598505)×(2/12) + ... 16 Since both approaches give identical answers, we can use the second approach based upon continuous compounding, which turns out to be more tractable mathematically. Throughout this chapter and for much of this book, we will use continuously compounded yields. We do not have to do a summation of the 360 terms as shown above.

7) to every cash flow of a bond, the price of a bond with a periodic coupon C paid k times a year, and face value F, is given as follows: P= C C C C F + yt + yt + . . 8) where t1, t2, t3, . . , tN are the N cash flow payment dates of the bond. Assuming the bond matures at time tN = T, and the time intervals between all cash flow payments are equal, then N = Tk, and t1 = 1/k, t2 = 2/k, t3 = 3/k, . . , tN = N/k. 8, the bond price can be expressed by the following formula: P= C  1  F 1 − Ni  + Ni  e −1 e  e i where i = y/k is the continuously compounded APR divided by k.

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