By Moorad Choudhry, Didier Joannas, Richard Pereira, Rod Pienaar
This e-book is a revised and up-to-date consultant to a couple of an important concerns within the capital markets this present day, with an emphasis on fixed-income tools equivalent to index-linked bonds, asset subsidized securities, personal loan subsidized securities and similar items resembling credits derivatives. although, basic strategies in fairness marketplace research, foreign currency and cash markets also are coated to supply a entire evaluate. the point of interest is on research and valuation concepts, provided for the needs of functional program. The e-book contains an accompanying CD-ROM with cost software program, designed to introduce readers to yield curve modelling. it is usually calculators for vanilla rate of interest swaps and caps.
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Additional info for Capital Market Instruments: Analysis and Valuation
As this is not an economics textbook, we will not present even an overview analysis; however the rate of interest at which both borrowing and lending takes place will reflect the time preference of individuals. Assume that the interest rate is 4%. If this is too low, there will be a surplus of people who wish to borrow funds over those who are willing to lend. If the rate was 6% and this was considered too high, the opposite would happen, as there would be an excess of lenders over borrowers. 1 The interest rate is the return received from holding cash or money, or the cost of credit, the price payable for borrowing funds.
The quoted rate is the annual one-year equivalent. An overnight deposit in the wholesale or interbank market is still quoted as an annual rate, even though interest is earned for only one day. The convention of quoting annualised rates is to allow deposits and loans of different maturities and different instruments to be compared on the basis of the interest rate applicable. We must be careful when comparing interest rates for products that have different payment frequencies. As we have seen from the foregoing paragraphs, the actual interest earned will be greater for a deposit earning 6% on a semi-annual basis than for one earning 6% on an annual basis.
SELECTED BIBLIOGRAPHY AND REFERENCES Choudhry, M. Banking Asset–Liability Management, Wiley Asia, 2005. Fama, E. ‘Short-term interest rates as predictors of inflation’, American Economic Review, 1975, pp. 269–82. 10 INTRODUCTION Fisher, I. The Theory of Interest, Macmillan, 1930. Galitz, L. Financial Engineering, rev. edn, FT Pitman, 1995, chs 10–11. Higson, C. Business Finance, 2nd edn, Butterworths, 1995. Kolb, R. Futures, Options and Swaps, 3rd edn, Blackwell, 2000. Van Horne, J. Financial Management and Policy, 10th edn, Prentice Hall, 1995.