DOI link for Fundamentals
Even though the concept of interest rates is familiar to most people, the interest rate is not generally directly observable in the financial markets. Short term interest rates are quoted on a daily basis in the money markets for maturities up to approximately one year, but longer term interest rates are traded only indirectly through the bond market. This chapter discusses the applications of financial derivatives with respect to risk assessment and elimination. Some methods for computing the net present value of a future cash flow are described using discount factors. As the financial markets around the world trade continuously, a more frequent quotation of interest rates is called for. The chapter also introduces continuously compounded interest rates, i.e., interest rates in continuous time.