a question in the "interest rate modelling" by James & Webber

youyn · June 27th, 2007, 2:33 am

Hello,I am reading the book and have a few questions:1. on Page 44, is the equation 3.25 correct? shouldn't the P(t, t0) be 1?2. if 3.25 is wrong, the equation 3.31 on page 47 should be also questionable. right?if I am right on above two questions, are there any other paper/books cover the same topics?much appreciated for the help.

newbanker · June 27th, 2007, 1:44 pm

QuoteOriginally posted by: youynHello,I am reading the book and have a few questions:1. on Page 44, is the equation 3.25 correct? shouldn't the P(t, t0) be 1?2. if 3.25 is wrong, the equation 3.31 on page 47 should be also questionable. right?if I am right on above two questions, are there any other paper/books cover the same topics?much appreciated for the help.No, it should not. P(t,s) = 1 if and only if t = s, and the paragraph leading to equation 3.25 begins with "If t < t0".It was equal to 1 in equation 3.25 because there the assumption was indeed t = t0.

youyn · June 27th, 2007, 1:58 pm

could you elaborate how to get 3.24 based on the paragrpah starting with "if t<t0" it seems to me that in the whole sector on interest rate swap, authors tend to add the principal of 1 which is paid back at the maturity into the formula (e.g. 3.14 & 3.15). this makes much easier to get the equation (3.19) which shows the swap rates are quivalent to par coupon rates. However, I have trouble to understand how the same techniques can be used to derive the equation 3.24.