MATH 2FM3 Lecture Notes - Lecture 18: Discounting

• School: McMaster University
• Department: Mathematics
• Course: MATH 2FM3
• Professor: Petar Jevtic

Document Summary

Suppose the lender sells the loan to an investor who values this sequence of payments using some interest rate j (cid:54)= i so his discount factor is j = 1. 1+j : the present value of it is. A = l n (cid:18) 1 n j j j + l i an(cid:101)j (cid:19) = l n j + l i (l l n j ) = i j where k = l n j is the present value of the principal. Makeham"s formula for valuing the original cash ows at rate j. The present value of the sth loan is. As = ls ts j + ls i ats(cid:101)j = ks + (ls ks), i j with ks = ls ts j . The present value of the entire loan is the sum of the present values of the m parts of the loan.