Fixed Income Mathematics
Offering explanations, exercises, and examples without demanding sophisticated mathematics, this self-teaching book will serve as a gateway to financial mathematics and to increased competence in business analysis.
TABLE OF CONTENTS Fixed Income Mathematics
Chapter 2: Interest, Its Calculation, and Return on Investment
This chapter introduces the concept of interest as payment for the use of capital, first in money form, with examples. It then presents the equation for calculating simple interest. The chapter then expands the interest concept to the notion of return on investment, with a wide variety of examples. The examples are particularly meant to make you aware of the various places where you can use financial analysis. You should especially know the conventions in the United States of interest and yield calculations on bonds and mortgages. When you finish this chapter, you should understand the concepts of interest and return on investment and have some knowledge of the many places where they can be used.
A GENERAL INTRODUCTION TO INTEREST
Interest is payment for the use of capital, usually in the form of money. It can also be thought of as rent for money borrowed for a period, which must be returned at the end of the period. Interest is stated as a percentage per time period, frequently in the form of an annual rate.
Most loans have a date on which the amount of the loan becomes due and payable to the lender. This is called the maturity date, and the loan is said to mature on that date. Some loans, such as most home mortgages, have planned periodic (usually monthly) repayments of principal before the loan matures. For most mortgages, these scheduled principal repayments are part of the monthly payment, which also includes interest. The maturity...
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