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Market Guides > Zero coupon discount factors

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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.

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Document Summary

Calculation of zero coupon discount factors from cash interest rates. Explanation of the methodology. Worked example.

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