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Tag Archive: Interest


The Rule of 72

In personal finance, if you divide the number 72 by the rate of interest, you get to know the number of years it will blogtake for you to double the money..
Ex: if the rate of interest is 9%, simply divide the number 72 by 9% and the answer is 8. Thus 8 years will take to double your money if you invest at 9% of rate of interest.

INTEREST: we can use this rule in reverse to know the rate of interest needed to double your money to achieve your set goal. Continue reading

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Inflation indexed bonds, a financial instrument which can act as a hedge against inflation by the RBI.,lets go in detail.Google

Before I describe their pros and cons Let us know what are they – They are the enhanced version of Capital Indexed bonds issued in 1997 by RBI. Capital indexed bonds provided inflation protection only for the principal while inflation indexed bonds provide inflation protection for interest payments as well. Theoretically, inflation indexed bonds could indicate the willingness of the government to maintain optimal Inflation numbers.

After the initial auction, inflation indexed bonds are traded in the secondary markets. A normal government security bond carries an inflation risk which the inflation indexed bonds are free from. So the difference between the rates of nominal rate of return from a normal government security bond would denote the inflation expectations of the market. Monetary policy makers can take cue from these market expectations to control the inflation rates.  Continue reading

As I posted yesterday on the Inverted Yield curve, as the future yield is a function of the expected spot rate and the term premium, either of imageswhich could go up or down separately or together. The talented RBI researchers should come out with their interpretation of the current yield trends of gilts in the forthcoming Annual Report of the Bank. So let’s try to build analogy on Term structure moving forward.
The “term structure” of interest rates refers to the relationship between bonds of different terms. When interest rates of bonds are plotted against their terms, this is called the “yield curve”. Economists and investors believe that the shape of the yield curve reflects the market’s future expectation for interest rates and the conditions for monetary policyContinue reading

Inflation Indexed bonds

Sometimes the social application like Whats up can be fun to debate things. Yesterday was arguing with one of my friend on the imagesrecently announced inflation indexed bonds, a financial instrument which can act as a hedge against inflation by the RBI.

Before I describe their pros and cons Let us know what are they – They are the enhanced version of Capital Indexed bonds issued in 1997 by RBI. Capital indexed bonds provided inflation protection only for the principal while inflation indexed bonds provide inflation protection for interest payments as well. Theoretically, inflation indexed bonds could indicate the willingness of the government to maintain optimal Inflation numbers.  Continue reading

Valuation Of Swaption: Back To School

imagesContinuing with our last post on Swaption, we are here to discuss the “Valuation of Swaption” today. A swaption can be settled in 2 ways as :-

  1. Physical settlement:- when an option is exercised to go ahead with the underlying Interest rate swap; and
  2. Cash Settlement:- When an option is exercised for the cash value and the market value of the underlying swap changes hands upon exercise.

Continue reading

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