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By Michael Osborne (auth.)

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Additional resources for Multiple Interest Rate Analysis: Theory and Applications

Sample text

Can this vague statement be made more precise? A positive answer to this last question is the fourth key result of multiple-interest-rate analysis and it is described in the next section. 4 Pattern in the cash flows is reflected in the product of the unorthodox rates in a precise way This section demonstrates that a relationship exists between the product of the unorthodox interest rates in a TVM equation and the structure of the equation’s cash flows. The relationship is precise but subtle, the subtlety making the explanation of this fourth key result more complicated than the first three results.

5), that is, Macaulay duration (MD) of the cash flows with this particular twist is equal to the product of the (n–1) unorthodox interest rates. 0 . 0 . 6), then the value for Macaulay duration applies to a set of cash flows with a more general twist. 7). 7)  Multiple Interest Rate Analysis Thus, Macaulay duration (MD) of the cash flows with a twist in the general situation (when the new interest rate R could take any value) is equal to the product of the (n–1) unorthodox mark-ups. 31) from the text.

Assume a retail loan in which one drawdown of the principal amount is made in period zero, C0, followed by a series of repayments Dt in periods t = 1 to n. These repayments (covering principal, interest, and other charges) are not necessarily equal in amount. 1). 1) The finance charge is the total amount repaid less the total amount advanced. 2) captures this definition. 2) t 1 Along with APR, the FC must be disclosed to the consumer in any credit agreement. The legislation defines the list of charges for inclusion in the FC, that is, it defines the ‘fully loaded’ list of items to be covered by the repayments(Dt) in addition to the repayment of principal.

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