Telephone: +44 (0)20 7920 9128
Email: [email protected]
Web: www.barbicanconsulting.co.uk
Published: 19th September 2009 by William Webster
Present value (PV) calculations are commonly used in financial markets. They are particularly relevant to over-the-counter derivatives. Their use includes pricing and marking-to-market transactions.
PV uses a discount factor to convert future money into today's money. The sum of any deal's cash flows in present value terms is referred to as the net present value (NPV). From a dealer's perspective this is important. Transactions with positive NPVs equate to profit and those with negative NPVs losses.
The following is an introductory explanation to zero coupon discount factors. The examples use USD rates where the instruments pay interest on an actual/360 day count basis.
Register for free or login to view the full publication
Calculation of zero coupon discount factors from cash interest rates. Explanation of the methodology. Worked example.
5th March 2010
A bond is a long term debt obligation. It is sold by the borrower who is called the "issuer" in order to borrow money for the medium and long term. Typically a bond will have a maturity of between 2 and 20 years. The issuer can be a bank, company or government institution. Zero coupon bonds are unusual. They pay the investor no regular interest and although they represent a small proportion of the bond market zero coupon bonds can have advantages for both the issuer and investor.
20th September 2009
Floating rate notes (FRNs) are bonds that pay investors a regular coupon linked to short term interest rates like three or six month Libor. This can suit the investor and issuer alike. The cost of issuance is key to the borrower. Discounts to par value and margins must be taken into account. Find out more about the all in cost.
4th March 2010
A bond is a long term debt obligation. It is sold by the borrower who is called the "issuer" in order to borrow money for the medium and long term. Typically a bond will have a maturity of between 2 and 20 years. The issuer can be a bank, company or government institution. A bond normally has a known maturity or redemption date and during its life pays the investor interest. The interest payments are called "coupons". Bond investors rank prior to equity holders in liquidation but are subordinate to secured lenders. From an issuer's perspective the coupons are usually tax deductible (unlike dividend payments on equity). Bond markets provide investors with variety. One of the most frequently issued bonds is called a fixed coupon bond. This is also referred to as fixed income security or fixed rate bond.
4th March 2010
Introduction A bond is a long term debt obligation. It is sold by the borrower who is called the "issuer" in order to borrow money for the medium and long term. Typically a bond will have a maturity of between 2 and 20 years. The issuer can be a bank, company or government institution. A bond normally has a known maturity or redemption date and during its life pays the investor interest. The interest payments are called "coupons". Bond investors rank prior to equity holders in liquidation but are subordinate to secured lenders. From an issuer's perspective the coupons are usually tax deductible (unlike dividend payments on equity). Bond markets provide investors with variety. One of the most frequently issued bonds is called a floating rate note.
18th September 2009
A dollar paid to you now is worth more than one paid to you in the future. Why? Because if you had a dollar now you could invest it and earn interest. Simple enough but exactly how much is money worth today when it is paid in the future? To answer that you need to know about discounting.