September 09, 2003

Interest Rate Arithmetic

Consider annual compounding, monthly compounding, and the convergence to continuous compounding.

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Continuous compounding involves the exponential function, which is its own first derivative. In terms familiar in this course, an account with continuous compounding increases at the rate R times the current balance.

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The exponential function is interesting.

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We learned to use Tables A, B, and C. Table C is the cumulative sums of Table A.

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We put Tables A and C together to calculate the market values of a 30-year 10% coupon bond for various interest rates.

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Posted by bparke at September 9, 2003 10:29 PM