Time Value of Money

EXAM FM - A Comprehensive List of Formulas

Effective Interest Rate: =

Simple Interest: () = 1 +
EXAM FM
Accumulation and Amount Function: () = () (0) = (0) = 1
()(1)
(1)

=
=
()(1)

(1)

FORMULA CARD
Force

Const
PV of
EXAM FM
- -A--AComprehensive
AComprehensive
Comprehensive List of Formulas
1+(1)
EXAM
EXAM
EXAMFMFM
FM A Comprehensive List
List
List of
ofof Formulas
Formulas
Formulas (1 + )
=
TIME VALUE Compound
OF MONEY Interest: () = =
Time Value of Money ()(1) ()(1)
AV of
Time
Time
Time
Time Value
Value
Value
Value ofMoney
of Money
Money
ofofMoney Effective Discount Rate: = ()
() ()
=
()
0

0
Accumulation and Amount Function: () = () (0) = (0) = 1 Force of Interest: () =
()

()
()
() =
()
()

()
()
()
() = () = (0)



Accumulation
Accumulation
Accumulation
Accumulation and and
and
and Amount
Amount
Amount
Amount Function:
Function:
Function:
Function: ()()
()
()
= = =
= ()
()
()
()(0) (0)
(0)
(0)== =
= (0)

(0) (0)
(0)
==1==
1 11 Force
Force
Force
Forceofofof
of
Discount Interest:
Interest:
Interest:
Interest: ==

Rate:= ==
= ==
() = =
1()
() =()
() ()
()
()== =
==

0
0
(1


00+ )



()
1 ()
()
() == 1== 1(0)
(0)


(0)
(0)
0 0
=1

00

=
()(1) ()(1) ()
()
() ()
Effective Interest Rate: ()(1)
= ()(1)
()(1)
()(1)
= ()(1)
()(1)
Constant Force of Interest: 1+ = 1 + = ln(1 + )
(1) ()(1)
()(1)
(1)
Effective
Effective
Effective
Effective Interest
Interest
Interest
Interest Rate:
Rate:
Rate:
Rate: =
= =
= = == = Constant
Constant
Constant
Constant ForceForce
Force
Forceofof ofof
Interest: Interest:
Interest:
Interest: () =

=
1= =1 1+
+ 1+ +
= ln=
= =lnln
(1 ln
(1 +(1 (1)+
+ +
) )
)
()
(1)
(1)
(1)
(1) (1)
(1)
(1)
(1) Nominal
PV of $1Rates: due in (1 years:
+ ) = 1 + (1 ) = 1 AV at
Simple Interest: () = 1 + = PVPV PV
PV
of of of
of
$1 $1 $1
$1
due due
due in in years:
years:
Simple
Simple
Simple
Simple Interest:
Interest:
Interest:
Interest: ()
()
()
()
== 1= =
+1 1+1+
+ = = = 1+(1)
=
1due inin years:
years:
()
1
() ()
(1
1 ()
1+(1)
1+(1)
1+(1)
1+(1) 1=1 11 = (1 + )== [(1 =+ )=(1
1] ) = (1 +
() =
()



()
()
) [1
=
(1 )
]()
)
()
()


()
Metho
Compound Interest: () = + ) (1 =


= == = ()
== (1==(1+(1 (1+)++
)
))
=

== === = = =
=(1= =(1 (1 (1) )
) = =
) = (1 + )
(1 =(1 + (1++ ) ) ) = = (1 ==
(1 (1
(1 ) ) ))

Compound
Compound
Compound
Compound Interest:
Interest:
Interest:
Interest: ()
()
()
()
== (1=(1= +(1+ (1)+ +
)

)) = = ==
()(1) ()
()
()
()
()(1)
Effective Discount Rate: ()(1) = = AV of $1 over years:
()(1) ()(1)
Effective
Effective
Effective
Effective Discount
Discount
Discount
Discount Rate: Rate:
Rate:
Rate: = =
= = ()(1)
()(1)
() ()(1)
= == = ()(1)
()(1)
()
AV AV AV
AV
of of of
of
Annuities
$1 $1 $1$1
over over
over
over years: years:
years:
years: ()

()

() ()
()
() () ()
()
()

Discount Rate: = = 1 = = + )11 1 111
(1
1 1
=1 = () = (1 + ) = = (1 ) = (1 +
()

()
()
() )
= (1
()


()
()
()
)

Discount Rate: = 1+
= 1 = = (1 + ) 1 1 11
=


= = ==
()()
Annuity-Immediate:
()
()== (1==(1+(1 (1+)++ )
)=)= = =

= = (1= =
(1 (1 (1)
)
) ) =

=(1 = = (1 + (1
(1 ++ + )) ))= = (1 =
= (1 (1 (1 )) )) Decre
Discount
Discount
DiscountRate:Rate:
Rate: === =1+
= 1=1 1 = == = = (1=(1 +(1+ 1 1
)+)) 1

== 1 11
1 =
1+1+ 1+
()

() (PV one period before first payment, AV at time of
(last
2)
payment)
2
Nominal Rates: (1 + )
() = 1 + (1 )
() = 1 AV at time of $1 invested at 1 time : =
) = 2 2 212 ()|

() ()
() () ()
() ( )
) 2 )212

Nominal
Nominal
Nominal
Nominal Rates:
Rates:
Rates:
Rates:(1(1+(1(1 + ++) ) =
)) =1= =
+ 1+
1 1+ + 1 (1(1(1(1
()) ) = )) = 1= =
1 1
1

1 AV AV AV

AV
at at=at
at
time
timetime
time =of

| +
of of
$1 of
$1
2
$1$1+
invested
invested + at=
invested
invested attime at
attime time
time ::
::

= == =2 (
((
== ) ==
1


111

()

= [(1 +
= [1 (1 1 ) 11 + (( (
1 )(1 )11)
1 )1 11 1] 1]
1 1 2 2 ++
()
() ()
()
= = = =

[(1 [(1 [(1
[(1
+ +
)+
+ )
))
1]
1]
1]1] ()() ()
()
= = = =
[1
[1[1[1
(1

(1 (1
(1
) ])
)
) ]]] Method of Equated Time: = 1
+
(1
22++
++
+ ) 1
( )|
1 111+ + 2++
++
+ (1Time (1 =+11+
) 1 ++
22=
=of| = 1Equated +Time)Time
+ : + = | (1 + )

Method Method
Method
Method of
of
ofEquatedEquated
Equated Time : ::= = = 1
2 122+ 2


1 + 1
+
1 +
21+
++
2 ++ ++
22++
Annuity-Due: Increa
Annuities ANNUITIES
(PV at time of first payment, AV one period after last payment)
Annuities
Annuities
Annuities
Annuities 1 ()|
Annuity-Immediate: Decreasing
= 1 + Annuity
= | - Payments
+ + 1 = =in( Arithmetic Progression:
= (1 + )
) | = 1 + 1|
|

Annuity-Immediate:
Annuity-Immediate:
Annuity-Immediate:
Annuity-Immediate:
(PV one period before first payment, AV at time of last payment) Decreasing Annuity
Decreasing
Decreasing
Decreasing Annuity -- Payments
Payments in Arithmetic
in Arithmetic
Annuity
Annuity Progression:
Progression:
- Payments - Payments in in Arithmetic
Arithmetic Progression:
1Progression:

|
(1 + )
(1 + ) |

(PV(PV (PV
(PV
oneone one
one
period period
period
period before before
before
before first first
first
first payment,
payment,
payment,
payment, 1 AV AV at time of last payment)
AVAV
at at attime
time timeof oflastoflastlast payment)
payment)
payment) ()
= | =

(1
=


+ |
) + (1 + )()


|
2
+ | +
(1 =
(1(1 +(1
(1
+)+ )+ +

)
= ) = ( ) = (1 + ) = 1
)
|

|
m-thly
= | 2
= + + + 1 =


1 11


() ()
()
() | =|

|
==

= |
|
() ()
()
() | =|
==

= | | | | +1|
| |

= ===
= = =
=+

+
+ +
2
2+22 + + =
+ ++ +
+=
= = |
|
()
|
| |

|
1 (1 + ) 1
Continuous Annuity: |
(1 + ) |
|
=
= | = 1 + (1 + ) + + (1 + ) (1= (1 +
) 1 = | (1 + )
( )| =


|1 |
|
(
)| (1
=(1 (1
(1
++ )+ +

) )
) |
| |
+(1
(1 )+
+ )
) 11 1
( ) =


|
( ) =

|

= = ==
| |
|
= =1=

=
+ 1+
(1
1 1+ + +(1
(1 (1
)+
+ + )
+)
) +
+ +
+ (1+
+ +
(1 (1
+(1+)++
1
)) 1
)= ==
11 = == == |
(1 (1+(1

(1 +

)+
+ )
)) ( (
( )|
)| )
=|
=


| =
=
| (
=((
()| ))|
)
=| = =

|
=
|


|
| |
0 Contin
Annuity-Due: Increasing/Decreasing Perpetuity -Payments in Arithmetic
0 Progression:
Increasing/Decreasing
Increasing/Decreasing (1 + ) Perpetuity 1 Perpetuity
Perpetuity -- Payments
Payments in Arithmetic

Progression:
Annuity-Due:
Annuity-Due:
Annuity-Due:
Annuity-Due:
(PV at time of first payment, AV one period after last payment) Increasing/Decreasing
Increasing/Decreasing
= | = 1 1 1 =Perpetuity
( ) | - Payments
= (1
- Payments
1 + ) inin in
Arithmetic
=Arithmetic
Arithmetic
() Progression:
Progression:
Progression:
( )|
(PV(PV (PV
(PV
at at at
at
timetime time
time of of of
of
first first
first
first payment,
payment,
payment,
payment, 1AV
AV one
one period
period after
after last
last payment)
payment) ( ) =
1AV AV one one periodperiod

afterafterlast last payment)
payment) ()| 1 =1 1 1 + 1 1 1 1 =1 11 | 1 0 11
1 0
= (1 + )| + +==
2
= =
= | = 1 + + + 2
1= 1 1
1 = ( ) |
= 1 + 1|
() ()
()
() | =| ==


| =
++ 2 = (( (
)(
)| )=
)| ==


|

=
=
|==
|
= |
1=
=

| +=
11 1+
+ +
+ + +
+1
+1
+ = 1
1
=== == ( == () (()| ))|

(1 =+
=(1


|
| )= =+(1
(1

(1
+1+
) +|
) )
)
=|

| 1=
=

| + =
1 1
+11|
++1|
1|



1| Deferred
|
Annuity:
2 22 |
2 222
(1 (1 2 (1
(1 m-thly Annuity: ( )|
|| +1 | |
= | = + ) + + ) + + + ) =(1 (1 +)) 1 = ( ) | = + )| = +1| 1 = = | = +| |
(1 (1
+ ) ++ ) 1 1 1

=
=
=| == |
(1 =
= =
+(1
(1 (1
++
) +)
) (1
+)+ +(1
(1 (1
+2+
) ++2))
) +22 + (1
+
+ +
+ +(1
(1 (1
++
) ) =
+=))= = = (= = ()=(())=)
(1
=
= =
+(1
(1 (1
++
) + )
)
) = = ==+1|
1 111 m-thly m-thly m-thly
m-thly Annuity: Annuity:
Annuity:
Annuity:
1 ()
|
|
| |

|
|


+1|
|
| | | | | +1| +1|
() () () () () ()

()
()
Continuous Annuity: Perpetuity:
| 1 =1 11

()
| =






|

( )
|
=


() | ||


|
Annui
Continuous
Continuous
Continuous
Continuous Annuity: Annuity:
1Annuity:
Annuity: ()() ()

()
= 1()() () ()()
1()
() | ||
()
= ()() 1()
()
(() ()
() () ()
()
) ()
()
= ()()
()
| = == () () ()
() = == (( ) ) = ==
= | = 1 = ( ) = = |
| |
= ()
=
|
| ||

= () |
| |
|
()
()
1
1 1
|

+1 |

|
| =
= == = +1 Continuously Increasing Annuity:
= | = ()|
))|| = = =
0

= = =
=
() = == (= ()( ()
= ==
= = =

0
)= = = () = = () = Continuously
Continuously = Increasing





|
| |
(1 +

1
|


Continuously
Continuously Increasing
Increasing
Increasing Annuity: Annuity:
Annuity:
Annuity:
( ) =
0 0
0 0 0 0 0 0 =

()
Relationships:


= | (1(1
= +(1 (1+)+ +

) )

)

11+ =
1 11 |

(1 + )
( ) =
|
= =

() |

Perpetuity:

== =
=|
| =
| =
== = = = Perpetuity: = (
(=()())| )
=
==(1 = =
(1
1+
Mortgage
+(1 (1 + + )

)+))

or
== Level
= Mortgage

()
= Annuity: ()
()
()
= or Level
()
Annuity:
|


|
=




|
|

==
2|

2| 3|
=


|
| |


| 0

0
| )
(
( )
(
(

2|
| )
) =
=

| ==


|
|
|
=|
|
+ | |= =

0

=
=1
== =
+

0 =



= 1 + + 2
Deferred Annuity:
0 0 00 0 0 00
0
0
| 0 0
|

|
()| +
()| + |

0 0 0 0
DeferredBond:
Deferred
Deferred
Deferred ||

Annuity:
Annuity:
=
=+1 |Bond:
Annuity:
Annuity: =

= Bond
= +| | Sold at Par: =
Bond Sold|at Par: = ( | )|
=
|

|
= (1 + ) = () Geom
)Increasing =| Annuity -(1
Payments in Arithmetic () Progression:
| |
|
| = | =

|
|
| = +| | (( (
| =
) |
( ))|== == = =
(1
(1 0 (1
++ )+ +

)))

=
== = 0
() ()
()
1st Pay
| || =|== | ||
=| ==


= ==

+|


| |


|
( + 1)

+1|
| +1 | | +| |
| | +1 +1+1 | | +|
Perpetuity:
Convexity: Convexity: ()
Annuity =
|
with
0
Varying
0 00
()
Annual = Rate
| 0 0
of
0 0
=
Payment:
| |
Perpetuity:
Perpetuity:
Perpetuity:
Perpetuity: 1 1 2 1 Annuity with Varying
Varying Annual of
2 Rate of Payment:
2
1
2 Annuity Annuity
Annuity with with with VaryingVarying Annual Annual
Annual Rate RateRate of of Payment: Payment:
Payment: 1
|
1= 1 11 2
| 1 = 1 1
| 1 2= 111
2 ( + 1) +2 (
+ 1) +2
+ 2 = ()

| +
=
() 0

| ( + 1)
+1|
=
| | |

= = = = =
=
==
|| =|
2


= =
= = 2

( ) = ( ) = =
=|| = == = =

| |

= | = () () = 0() ()


= =
| | |

= = = 0 ()
() ===
() () 00




0 0
Relationships: (1 + )2 0 0 00 (1 + )2 0 0 00
Relationships:
Relationships:
Relationships:
Relationships: 2| 2|
3|
= () () = ()



2| = |
+

| = 1 + 2|
2|


=
2|
3|
3|
= 1 + +
3|

2
Loans

=

() ()
() ()
()
() =

() ()

= = = =
+
+
++ 2|2|
=
2|
=
=
|1 =+
1 1
+1
+ =2|
+
= = =
2|

| =
3|
=
|=1 =
+
1 1+ 1
++ 2
+ +
+ +

2
22 = = =
()0 () ===
()0 ()
and are duration and price of components of Portfolio0 0 00
| Duration
of a Portfolio:


2|2| 2|
Duration
2| | || of | |
a | |
Portfolio: | || and are duration
| | and
| price of components of Portfolio
0 0 00
Increasing Annuity

- Payments

|
in

|
|
|
1+ 2 2 +Progression:
|
|
+ Geometric
Amortization Annuity-Immediate:
Method:
1 1 + 2 2 + + 1Arithmetic
Geometric Geometric
1stst Payment
Geometric
Geometric Annuity-Immediate:
Annuity-Immediate:
Annuity-Immediate:
Annuity-Immediate:
is 1,
()
Increasing
Increasing
Increasing
Increasing Annuity
| = -()
Annuity
Annuity
Annuity Payments-- Payments
-Payments+
Payments
+ inin

=
+ inin
Arithmetic
Arithmetic
Arithmetic
Arithmetic
1 + Progression:
+1| +
Progression:
Progression:
Progression:
(+ 1)
+ Levelst payment , Subsequent
Outstanding Payments balance Increasing , Principal by repayment%
()| | = |
|


1 () 2 =
|
|
|
|
|



+1| =+1| 2
+1|


( (+((
+1)+ +
1)1) 1)
st st
11Payment
1 1Payment Payment
Payment is is 1,isis 1, 1,1,
Subsequent Subsequent
Subsequent
Subsequent
Payments Payments
Payments
Payments Increasing Increasing
Increasing
Increasing byby by
by
% % %
%
() ()
()
()

=
| ()
() =
|
=
+1| = 1| 1 + = + = = (1 +1 )
=|== () () =| ==

= == ( )
) = (1 ) (1

| |
| |
|
First-Order | First-Order
Modified Price
|
|
Modified
Approximation:
Price +1|

() ( +(
Approximation: 1) ) (() )( ( ) 0 ) (( )
0 )(
= 1 1
1 +01()
(
1+11+
+
+
(
) ) 0 )
( )| | = |
|



( )|
=
= (
( + (
( +
1) + +
1) 1)1) 0 0 0 0 1 1 ( ( 1 1 )+ + ) +1 1 1 11











|
| ||

|
+1|

+1|
+1| == 1
= +
1 +
=
+
= (1 + = )(1 = (
) 1 ) ) ))
(
)(
((
)| =
))|
== = (
)(
(( )|=))|
==

= = == = +1|
= =
= = (1
= (1 (1
) )
) ( (( 1
| |
| |
1+0 (0 ) 1+0 (0) 1 1 1 1



First-Order Macaulay Price Approximation: () (0 ) ( First-Order Macaulay Price Approximation: ) () ( ) ( )
= = = 1
Loans 1+
0 1+
Loans
Loans
Loans
Loans Interest Rate Swaps
LOANS | ()
= Interest Interest
Interest
Interest Rate
= Rate
(1Swaps
Rate
Rate +Swaps)
Swaps
Swaps | ()
Amortization Method:
Amortization
Amortization
Amortization
Amortization
Level payment Method: Method:
Method:
Method: , Outstanding balance , Principal repayment IMMUNIZATION IMMUNIZATION
Sinking Fund Method: Constant Notional Value:
LevelLevel Level
Level payment payment
payment
payment ,, ,
, Outstanding
Outstanding
Outstanding
Outstanding balance balance
balance
balance
,
Principal,, Principal
,Principal Principal repayment repayment
repayment
repayment +1 Loan , SF Deposit D, Constant Constant
Constant
Constant
n year Notional
Interest on
swap Notional
Notional
Notional
Loan rate ,Value:
Value:
= Value:
Value:
Interest 1
on SF
= | =(i) + = PV(Liabilities)
= PV(Assets)
(i) = (1=PV(Liabilities) ) (i) =
Redington Immunization: (i)
1
Redington Immunization: PV(Assets)
+1 ) (i) = n
year
n nn=
year
year
year swap(i)
swap
swap
swap
rate = 1
rate
rate
rate
=
=
= =11
1 1
= =
==

=
= = =+ +
+ +


= = = =

(ii)

= =
Duration(Assets) =
(1=(1 (1
(1


+1
)= )Duration(Liabilities)
+1
+1 ) = +(ii) =
t-year
=
deferred =
m year
| rate:
swap
(ii)
= = =
+
= +
+(ii) = Duration(Assets) = Duration(Liabilities) (ii) = (ii) =

|
| | |
= = +1


(1 + ) =

|
+1



++

t-year
t-year deferred
deferred m year swap rate: +
m year swap rate: = = 2
| |
(iii) 1
Convexity(Assets) > Convexity(Liabilities) t-year
(iii) t-year deferred
deferred 2m myear year swap
swap rate:
(iii) rate: 2 == + +
+ +
>(iii)
at"time " +1 >
2

= =
=
=

=
= =
=

+1
+1
+1
+1
+ =
+ =
+
+ (iii)
==(1
(1Convexity(Assets)
+ (1
(1 +)+ + )
)) = = =
=
1

1
> Convexity(Liabilities)
1
1
(iii) "Fund
Sinking > "Balance
t = = |
>
+1
+1
++ ++
+1 ++
++ +
+ +
+

= = = 1 Variable Notional Values: ( ) = [1,]

Full

= Immunization:
=
=
=
Full
(i)
Immunization:
and

= (ii)
=
=
= as
above, (i)and (iii)
= =
(ii)
One
= = as


1
1 Asset
1
1
above,

cash

(iii)inflow
One Asset beforecash eachinflow Net
Liability before
Amount cashof eachInterest
outflow Liability
andpaid
Variable
Variable cash
one
Variable outflow
in Notional
Variable year
after t it.
Notional
Notional
Notional and
= Values:
=Values:
one
Values:
Values: ( after
( it.
(
(
(
1 ))
))=

= )=
=
[1,]
[1,] [1,]

[1,]
= | () = (1 + ) | () Principal Repaid in year t = = 1 = + (1 )
+ ) Match boththe thetime amount and the
= =
Exact
=
=
Matching




|
||
| Exact
()
()
()
()
or Matching
Dedication: = =
(1 = =
Match(1 or (1
(1
+ Dedication:
)+
+ both
) ) the

| amount
| ()
and
()
()
| ()
| of Assets andtime of Assets and Liabilities
Liabilities
Sinking Fund Method:
Sinking Sinking
Sinking
Sinking LoanFund Fund
, Fund
Fund
SFMethod: Method:
Method:
Method:
Deposit D, Interest on Loan , Interest on SF
Loan Loan Loan
Loan , , SF ,
,SF SF SF
Deposit Deposit
Deposit
Deposit D,D, D,
D,
InterestInterest
Interest
Interest onon onon
Loan Loan Loan
Loan Interest
Interest
,,Interest
, ,Interest onon on
SF on SF SF
SF 1 1
= + = = | INTEREST
= 1 INTEREST 11 =INTEREST
1RATE 1+SWAPS111 RATERATE SWAPS SWAPS

== ==
+ + +
+ = = =
= = = =
=


| | |

| === = | == | =
= +
+ |
+ +
Sinking Fund Balance at time t = = |
1 |||

| |
|
|
1 |

| |
|


| [1,] [1,]
Constant
Sinking
Sinking Fund
Fund Notional Balance
Balance Constant
atValue:
at
at time
time =tNotional
t n-year t= = swap
= Value: rate n-year
= swap rate = NotionalVariable
Variable Values: Notional = Values: =
Sinking
Sinking Fund Fund Balance
Balance at
timetime =t
= = =

|
|
| |
Net Amount of Interest paid in year t = = (1 ) + (1+
)
1 (1+ )

Net t-year
Net Net
Net
Amount AmountAmount deferred
Amount of of of
of
Interest m-year
Interest t-year
Interest
Interest paid
paid deferred
swap
paid
paid
in in year in
in rate:
year year
year t= m-year
t= tt= ==
=
=swap
=


+


++ 11
( rate:
(
(
( )
1) =) )
1 +1 +++ = (1 + )
= (1
[1,] =+ )
1
[1,] = = 1 1
1 = 1 1
Principal Repaid in year t = = (1+1 )1 (1+1 )
+1
1 = + + (1 )
Principal Principal
Principal
Principal Repaid
Repaid Repaid
Repaid in in yearin
inyear year
year
t =t = tt=== =
=
=





1 1 = 1
1 == = +
+ + +
( (
(
(11 )1) ))
1
Callable Bonds - To calculate appropriate price: + +
If Bond is sold at a Premium, assumeEXAM FM 2017 NEW SYLLABUS a1Review1
0 1 1 1
Early Redemption date If Bond is sold at Discount, assume Late Redemption date
If Bond is sold at a Discount, assume Late Redemption date Price of a Stock - Dividend Discount Model:
Bonds BONDS
st = , Level dividends
BONDS
nd
1nd Column
Price Formulas: Number of Payments , Interest Rate , Coupon Rate 2 Column

, Face Value , Redemption Value
Column
2Price Formulas: Number of coupon payments , Coupon If => , Dividends increasing at = rate % with (first attime 1, <
rate , then > and Premium = ) | = ( ) |
If
= >
=
then
, |
++

> and

Premium
=
= + (
+ =
(
)

)
= ( )
= +

| = (
( ),)
| =
, =

| |
| Amortization of Premium Amount: = = 1 = ( ) +1
Amortization of Premium Amount: = = 1 = ( )Spot Rates: Effective annual yield rate on
+1 investment for years,
=
If +, then ( ), and =Premium , == ( )| = ( )|
Book Amount Value: for Amortization
= zero-coupon
1 of =
Premium |+= =+ +1
>Value: > = ) 1 = ( )
Price =
Book = 1 = | +
of a -year Bond: = (1
Interest Earned = = Book Value = = = + Interest
Earned: = 1

Interest Earned: = 1 1 1 |
Annual)
Price (1 + ) , 0 < < 1 ) Forward
(Effective
Rates: +1 =
If <between, then < Coupon and Discount Dates: + = = = ( ) | = ( If
()
Amount
< , then

|-year
=
forward
for < rate,=
Accumulation
and Discount
deferred
of Discount
years:= =
() = = =
(

= =
)|

=(
1 ) +1
= (
) |
Quoted
IfInterest
< , Earned Price:
then < =and Discount == (1 + = ) ( ( )|
= =) 1|+= =
= = + 1 Book Value +
Accumulation

of 1+
Discount Amount:
+ = = = ( ()|
)
+1
| (1
Perpetuity:+
+1 ) (1 + = ) = (1 + )
Mortgage or Level Annuity:
1 =
Accumulation of Discount Amount: = = 1 = ( ) [,+] +
Callable
Price between BondsCoupon - To calculate appropriate price: Book Quoted Value:Price ()
== +
= (1 ++) |
Book Value: = + Dates:
= + = (1

| +
+ ) , 0 < < 1 One-year
Bond: forward
=

1
rate,
| +
+
deferred = |

years:
Bond Sold at Par: = |
If Bond is sold at a 1 Premium, assume Early Redemption date Interest Earned: = 1

Interest Earned: = 1 [,+1]
(1+
= Early +1 ) +1

1 = IfBond
1 is sold at a Discount, assume Late Redemption.
If Bond isBonds
Callable sold at-aToDiscount, Calculateassume Appropriate LatePrice: Redemption If Bond isdate sold at a Premium, assume (1+ )Redemption;
+1
Convexity:
2 2
GENERAL CASH FLOWS 2 2 ( + 1)GENERAL +2 2 CASH +FLOWS
General
2
nd
Column Cash Flows GENERAL
nd =
2
CASH Column FLOW = = = =
st (1 + )2
1If > , then > and Premium = = ( )|
Column = ( ) 1 | Column
st
Reinvestment Rates:
Amortization
Reinvestment
- A single deposit of
Rates: Premium
of $1, Interest
interest Amount:
rate rate , Reinvestment
, =
reinvestment
=rate
rate
1 :
= (
1 +
Reinvestment
Inflation
)

+1 Rate: Rates:
Real rate Interest of interestrate , Reinvestment
, Inflation raterate
|
ABook single
-Deposits Value:
deposit of
$1 of
at= $1,

beginning
= 1 = +
of

each
||
year,+

interest +1
rate , reinvestment
A
rate single
Duration
1 +: = deposit
(1 of
= + a
+ of
Portfolio:
)(1 $1,
+
() ), = and1
= +
are
+
| duration
+ and price of components of Portfolio
() = = 1 () =
=
= |
Deposits
Interest Earned: of$1 at beginning
= of each year, = + ()
| Deposits
() of $1=at1beginning 1 + 2 2 + ofeach + year, = + ()|
1
Perpetuity: =Method: A is initial
Dollar-Weighted 1+
Mortgagebalance, orBLevel is ending Annuity: balance, ()| Duration:
= is contribution at time . = + (1)
1 + 2 +
+

|
Rate of +1
Dollar-Weighted <Rate ofDiscount
Return: = = ( )| Dollar-Weighted Return: () = )= =

If < , then | and = ( )
|
() = =
Bond:
() +
Bond Sold at Par: First-Order
Modified Price Approximation: () (
(0 )( 0 ) ( )
Time-Weighted
Accumulation
= +
= Method:
, Initial balance
isA,balance Endingat time before
balance
B, Contribution any contribution,
= =
( ) is +1
contribution , Initial
at time balance . 1A, + Ending
= balance 1 2
B, Contribution
0
0
(1) of Discount Amount: |
= = 1 = + (1) 1+
0 1 +1 1 +1
()|

Book
Price Value:
of a Stock =- Dividend 1 + Discount = | + = ( )
Model: Perpetuity: =
=
( Mortgage or
%Level Annuity:
1+0
(0 ) =
Convexity: First-Order Macaulay Price
Approximation: ()
( )
(
) 1, < )
|

0
Time-Weighted Method:
2 real rateTime-Weighted Method: 1+
Interest Earned: 2= 1 () +

ofBond: Bond Sold at Par:

|
where
1 = = |
interest, inflation rate

1Inflation
+ = Rate: 12
2 1+ =
2
(1 + )(1 + ),
, Balance = before
( ++1) + any ,+2 contribution 2
2
+ +
+
1 +

= , Balance before any contribution
= 0 1 1= 1 1 = = = 0 1 +1 1 +1
Spot Rates: (Effective Annual) yield rate on investment

for years. (1 + Price
) 2
of a -year zero-coupon Bond = (1 + )
IMMUNIZATION
Convexity:
Price of a Stock - Dividend Discount Model: GENERAL CASHPrice FLOWS of a )Stock - Dividend Discount Model:
Forward Rates: (Effective Annual) -year forward rate, deferred years: (1 2 ) = (1 + + )+ 2
+ (1 + [,+]

= , Level dividends Redington 2 (i) PV(Assets) =PV(Liabilities) 2 (i) =
2Immunization: +2
= , Level
dividends
( + 1) +
1Duration
st
Column of a Portfolio: and are duration and price of components of Portfolio = = )+1 (ii) =
Duration(Assets) = Duration(Liabilities) = =
=

, Dividends 1 1increasing
+ 2 2 + at+rate %One-year with first forward at time rate, 1,deferred
< years =
(1+ +1 1 =
1 (1 + )2(ii) =
Reinvestment
()
= Rates: Interest rate , Reinvestment rate
= [,+1] , Dividends (1+ )increasing
at rate % with first
(iii)+1
Convexity(Assets) at time 1, <
> Convexity(Liabilities) (iii) " >

A single deposit of $1, 1 + 2 + = 1 + +
|
Spot Rates: Effectiveannual yield rate on investment
+1 for years, ()|
Full Immunization: =(i) annual and(ii)and asMortgage
above, (iii) One Asset cash inflow before each Liability cash
1+
Duration:
Deposits
First-Order ofModified
$1 at ()beginning
= Price =of each year,
()
==) +() = = Spot

Perpetuity:
Duration Rates: of Effective

a
Portfolio: yield rate
are duration on orinvestment
Level and Annuity:price forof years,
components
= of Portfolio
Price of a -year
zero-coupon Approximation:
Bond:
= (1 +() ( 0 ) | (
0 )( 0 ) (0 )
Price of a -year () 1 1 ++
zero-coupon 2 2 +Bond: + = (1 + )

|
()
ExactBond:Matching == or Dedication:
MatchSold bothatthe amount and the time of Assets and Liabilities
1 + 2 + Bond Par:
|
Dollar-Weighted Rate of Annual) Return: 1+0 (0 ) + = |

Forward
First-Order Rates: Macaulay (Effective Price Approximation: () ( ) ( )
-year
forward rate, deferred years:
0 Forward Rates: (Effective Annual)
Duration
= + , Initial balance
andA, Ending
are the balance duration B, and Contribution 1+
price of components of Portfolio
1 1 +2 2 ++
of a Portfolio: First-Order forward Modified rate,()
deferredPrice Approximation: =years: (0 ) (0 )( 0 ) (0 )
-year 1 +2 ++()
(1)
(1 + ) (1 + [,+] ) = (1 + + )+ INTEREST RATE SWAPS
(1 + ) (1 + [,+] ) = (1 + + )+
) 0 (0 )
Time-Weighted Method: () (0 )IMMUNIZATION
(01+
One-year
First-order forward
modified rate,price deferred years:
approximation: (0 )( 0 )First-Order (0 ) First-order
Macaulay Macaulay
Price price approximation:
Approximation: 1 ( ()
1+ 0)( 0 ) ( 1+ )
(1+ 2+1 Constant
One-year Notional
forward rate,Value: deferred n-year swap
years: rate =() 0 ) ( Variable Notional Values: =
+ =
1[,+1] 1
= 0 (1+ +1 ) , Balance before any contribution 1+
1 1 = 21
1 + 1 +
Redington Immunization:
) +1 (i)1
PV(Assets) = PV(Liabilities) 2 (i) (1+
= +1 )+1 (i) =+ (

t-year =
[,+1] deferred m-year 1 swap= 1
+1rate:(ii)
2 2 (+1) +2 2 + = = (1
= + ) [1,] = (1+
Convexity: = =(ii)Duration(Assets) = = Duration(Liabilities)
= =
(ii) (1+ = )
+1 ++ +
Price of a Stock - Dividend
(iii)Discount

Convexity(Assets) Model: >Convexity(Liabilities)
(1+) 2
(iii) " > " (iii) 2 > 2 IMMUNIZATION
nd
2 =Column , Level dividends
nd Liability cash outflow and one after it.
Full Immunization:
=
(i) and (ii) as above, (iii) One Asset cash inflow before 2
, Dividends increasing at rate % with first at time 1, IMMUNIZATION <
each ColumnImmunization: (i) PV(Assets) DETERMINANTS
Redington = PV(Liabilities) OF INTEREST RATES (i) =
Immunization
Inflation Rate: Real rate of interest , Inflation rate (ii) Duration(Assets) = Duration(Liabilities) (ii) =
st
1Exact
+ =Matching(1 + )(1 or + ), Dedication: = + Match + both the amount and the time of Assets 1 Column
Inflation and Liabilities
Rate: Real rate of interest (iii) Convexity(Assets)
, Inflation rate> Convexity(Liabilities) (iii) " >
Spot
Redington Rates:Immunization: Effective annual yield rate on investment
(i) PV(Assets) = PV(Liabilities) for years, 1U.S. + = (1 (i)
Treasury Bills:
+ )(1 =+ ), = + + (i)

=

Price of a -year zero-coupon Bond:

Duration: = (1 + ) = Duration(Liabilities)Full Immunization:
(ii) Duration(Assets) (ii) = (i) and (ii) as above,(ii)(iii) One
360
Asset
=
cash inflow before each Liability ca
= (1 )
= ( ) ( )

(iii) Convexity(Assets) > Convexity(Liabilities)
INTEREST RATE SWAPS
Duration: (iii) " > " 360
(iii) >
2 2
Forward Rates: (Effective Annual) Exact Matching or Dedication: Match both the amount and the time of Assets and Liabili
-year
Full
Constant forward
Immunization: Notional rate, Value:deferred
(i) and n-year(ii)as years:
swapabove, rate(iii) = One 1
Asset cashVariable inflow before NotionalGovernment
each Liability
Values: of Canada [1,]
cash outflow
= Treasury
and Bills: one after it.
365
(1 + ) (1 + [,+] ) = (1 + + )+ and = Liabilities (1+ ) = ( )( )
Exact
t-year deferred Matching m-year or Dedication: swap rate: Match=
both
+the amount and the time of Assets
= (1 + ) [1,] = 1 =
1
1 INTEREST RATE SWAPS
+1 +++ (1 + (1+1 ))1
One-year forward rate, deferred years: 365
(1++1 )+1 1
[,+1] = 1= 1 Default
ConstantRisk: amount
Notional received
Value: n-yearwith
swapno default
rate = Variable Notional Values:
Determinants of Interest Rates DETERMINANTS OF INTEREST
(1+ ) +1
RATES
(1 ) = , amount received with a default

rate
+
DETERMINANTS (1 OF
t-year INTEREST
deferred RATES
m-year swap rate: =
) + () = , with a partial recovery
++rate = (1 + ) [1,] =
st +1 +
1nd Column
U.S. Treasury Bills: = = (1 )

= = ( ) ( )
360
2U.S.Column
Treasury Bills: 360 Components of Interest Rate :
360 rate without default risk, rate for risk compensation,
365 inflation rate
Government of Canada
(1 Real)
= Rate: Treasury Bills:

= ( = =
)( ) = = ( ) ( ) DETERMINANTS OF INTEREST RATES
Inflation 360 rate of interest , Inflation rate (1+365)
1 + = (1 + )(1 + ),
= + +
Withst Default Risk but No Inflation:
Default
Government Risk:of Canada Treasury Bills: 1 Column
= (1 + )(1 + ) 1 (effective) = + (continuous)
(1 ) = , amount received with no default,365 amount
received with default, U.S. Treasury Bills:
default rate
Duration:
=+ () = , with a partial
rate
= ( ) ( ) 360
(1 ) recovery With
Default
= Risk
(1 and Known ) Inflation:
= ( )( )
(1 + )
365 = (1 + )(1 + )(1 + ) 1 (effective) = + + (continuous)
360
Components of Interest Rate : No Inflation but with Default Risk: = (1 + )(1 + ) 1, rate without default risk,
rate forRisk:
Default risk compensation
amount received (Effective
with noRates) default = + , with Continuous Government
With
Rates of Canada
Default Risk and UncertainTreasury Bills:
Inflation:
(1 ) = , amount received with a default rate , and continuous expected and 365 inflation rates
With Known Inflation and Default Risk:
(1 ) + () = , with a partial recovery rate = (1 + )(1 + )(1 + ) 1,
= + inflation
effective =+ + rate
= + + ,
= ( unexpected
with continuous ) ( rates )
(1 + )
With Uncertain Inflation: = + + + , continuous expected inflation rate, continuous unexpected inflation rate 365
Components of Interest Rate :
rate without default risk, rate for risk compensation, inflation rate Default Risk: amount received with no default
(1 ) = , amount received with a default rate
With Default Risk but No Inflation: (1 ) + () = , with a partial recovery rate
= (1 + )(1 + ) 1 (effective) www.ACTEXMadRiver.com
= + (continuous)
Components of Interest Rate :
www.StudyManuals.com
With Default Risk and Known Inflation: rate without default risk, rate for risk compensation, inflation rate