rate2disc

Discount factors from interest rates

Syntax

Disc = rate2disc(Compounding, Rates, EndTimes)
Disc = rate2disc(Compounding, Rates, EndTimes, StartTimes)
[Disc, EndTimes, StartTimes] = rate2disc(Compounding, Rates,
EndDates, StartDates, ValuationDate)
[Disc, EndTimes, StartTimes] = rate2disc(Compounding, Rates,
EndDates, StartDates, ValuationDate, Basis, EndMonthRule)

Usage 1: Interval points are input as times in periodic units.

Usage 2: ValuationDate is passed and interval points are input as dates.

Arguments

Compounding

Scalar value representing the rate at which the input zero rates were compounded when annualized. This argument determines the formula for the discount factors:

Compounding = 1, 2, 3, 4, 6, 12

Disc = (1 + Z/F)^(-T), where F is the compounding frequency, Z is the zero rate, and T is the time in periodic units; for example, T = F is 1 year.

Compounding = 365

Disc = (1 + Z/F)^(-T), where F is the number of days in the basis year and T is a number of days elapsed computed by basis.

Compounding = -1

Disc = exp(-T*Z), where T is time in years.

Rates

Number of points (NPOINTS) by number of curves (NCURVES) matrix of rates in decimal form. For example, 5% is 0.05 in Rates. Rates are the yields over investment intervals from StartTimes, when the cash flow is valued, to EndTimes, when the cash flow is received.

EndTimes

NPOINTS-by-1 vector or scalar of times in periodic units ending the interval to discount over.

    Note:   When ValuationDate is not passed, the third and fourth arguments (EndTimes and StartTimes) are interpreted as times.

StartTimes

(Optional) NPOINTS-by-1 vector or scalar of times in periodic units starting the interval to discount over. Default = 0.

EndDates

NPOINTS-by-1 vector or scalar of serial maturity dates ending the interval to discount over.

    Note:   : When ValuationDate is passed, the third and fourth arguments (EndDates and StartDates) are interpreted as dates. The date ValuationDate is used as the zero point for computing the times.

StartDates

(Optional) NPOINTS-by-1 vector or scalar of serial dates starting the interval to discount over. StartDates must be earlier than EndDates.

Default = ValuationDate.

ValuationDate

Scalar value in serial date number form representing the observation date of the investment horizons entered in StartDates and EndDates. Required in Usage 2. Omitted or passed as an empty matrix to invoke Usage 1.

Basis

(Optional) Day-count basis of the instrument when using Usage 2. A vector of integers.

  • 0 = actual/actual (default)

  • 1 = 30/360 (SIA)

  • 2 = actual/360

  • 3 = actual/365

  • 4 = 30/360 (BMA)

  • 5 = 30/360 (ISDA)

  • 6 = 30/360 (European)

  • 7 = actual/365 (Japanese)

  • 8 = actual/actual (ICMA)

  • 9 = actual/360 (ICMA)

  • 10 = actual/365 (ICMA)

  • 11 = 30/360E (ICMA)

  • 12 = actual/actual (ISDA)

  • 13 = BUS/252

For more information, see basis.

EndMonthRule

(Optional) End-of-month rule when using Usage 2. A vector. This rule applies only when Maturity is an end-of-month date for a month having 30 or fewer days. 0 = ignore rule, meaning that a bond's coupon payment date is always the same numerical day of the month. 1 = set rule on (default), meaning that a bond's coupon payment date is always the last actual day of the month.

Description

Usage 1: Disc = rate2disc(Compounding, Rates, EndTimes) or Disc = rate2disc(Compounding, Rates, EndTimes, StartTimes) where interval points are input as times in periodic units.

Usage 2: [Disc, EndTimes, StartTimes] = rate2disc(Compounding, Rates, EndDates, StartDates, ValuationDate) or [Disc, EndTimes, StartTimes] = rate2disc(Compounding, Rates, EndDates, StartDates, ValuationDate, Basis, EndMonthRule) where ValuationDate is passed and interval points are input as dates.

rate2disc computes the discounts over a series of NPOINTS time intervals given the annualized yield over those intervals. NCURVES different rate curves can be translated at once if they have the same time structure. The time intervals can represent a zero curve or a forward curve.

The output Disc is an NPOINTS-by-NCURVES column vector of discount factors in decimal form representing the value at time StartTime of a unit cash flow received at time EndTime.

You can specify the investment intervals either with input times (Usage 1) or with input dates (Usage 2). Entering ValuationDate invokes the date interpretation; omitting ValuationDate invokes the default time interpretations.

For Usage 1:

  • StartTimes is an NPOINTS-by-1 column vector of times starting the interval to discount over, measured in periodic units.

  • EndTimes is an NPOINTS-by-1 column vector of times ending the interval to discount over, measured in periodic units.

For Usage 2:

  • StartDates is an NPOINTS-by-1 column vector of serial dates starting the interval to discount over, measured in days.

  • EndDates is an NPOINTS-by-1 column vector of serial dates ending the interval to discount over, measured in days.

If Compounding = 365 (daily), StartDates and EndDates are measured in days as in Usage 2. Otherwise, in Usage 1, the arguments contain values, T, computed from SIA semiannual time factors, Tsemi, by the formula T = Tsemi/2*F, where F is the compounding frequency.

Examples

Example 1 demonstrates Usage 1. Compute discounts from a zero curve at 6 months, 12 months, and 24 months. The times to the cash flows are 1, 2, and 4. You are computing the present value (at time 0) of the cash flows.

Compounding = 2;
Rates = [0.05; 0.06; 0.065];
EndTimes   = [1; 2; 4];
Disc = rate2disc(Compounding, Rates, EndTimes)
Disc =
    0.9756
    0.9426
    0.8799

Example 2 demonstrates Usage 2. Compute discounts from a zero curve at 6 months, 12 months, and 24 months. Use dates to specify the ending time horizon.

Compounding = 2;
Rates = [0.05; 0.06; 0.065];
EndDates = ['10/15/97'; '04/15/98'; '04/15/99'];
ValuationDate = '4/15/97'; 
Disc = rate2disc(Compounding, Rates, EndDates, [], ValuationDate)
Disc =
    0.9756
    0.9426
    0.8799

Example 3 demonstrates Usage 1. Compute discounts from the 1-year forward rates beginning now, in 6 months, and in 12 months. Use monthly compounding. The times to the cash flows are 12, 18, 24, and the forward times are 0, 6, 12.

Compounding = 12;
Rates = [0.05; 0.04; 0.06];
EndTimes = [12; 18; 24];
StartTimes = [0; 6; 12];
Disc = rate2disc(Compounding, Rates, EndTimes, StartTimes)
Disc =
    0.9513
    0.9609
    0.9419
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