Chapter 1 Interest Rate

Functions

  • Accumulation function \[a(t)\]

  • Discount function \[a^{-1}(t)\]

Interest rate

  • Effective rate of interest/discount \[i,d\]

  • Simple interest \[a(t)=1+it\]

  • Compound interest \[a(t)=(1+i)^t\]

  • Discount factor \[v=(1+i)^{-1}\]

  • Accumulation factor of \(t\) years \[(1+i)^t\]

  • Discount factor of \(t\) years \[(1+i)^{-t}\]

  • Nominal rate of interest/discount \[i^{(m)},d^{(m)}\]

  • Force of interest \[\delta\]

Values

  • Accumulated value (future value)

  • Present value

Accumulation and discount

\[a(t)=(1+i)^t=(1-d)^{-t}\]

\[a^{-1}(t)=(1+i)^{-t}=(1-d)^t=v^t\]

Effective interest rate and discount rate \[i=\frac{d}{1-d}\]

\[d=\frac{i}{1+i}\]

\[d=iv\]

\[v=1-d\]

\[i-d=id\]

Nominal interest rate and effective interest rate

\[1+i=\left(1+\frac{i^{(m)}}{m}\right)^m\] \[1-d=\left(1-\frac{d^{(m)}}{m}\right)^m\] \[d^{(m)}=i^{(m)}\times\left(1+\frac{i^{(m)}}{m}\right)^{-1}\]

Force of interest

\[\delta(t)=\frac{a'(t)}{a(t)}\]

\[a(t)=e^{\int_0^t\delta(s)ds}\]

\[\delta=\ln(1+i)\] \[\delta=\lim_{m\rightarrow\infty} i^{(m)}=\lim_{m\rightarrow\infty} d^{(m)}=\ln(1+i)\]

\[d\le d^{(2)}\le d^{(3)}\le\cdots\le \delta\le\cdots\le i^{(3)}\le i^{(2)}\le i\]