alexa The Interest Rate Algebra
ISSN: 2151-6219

Business and Economics Journal
Open Access

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Research Article

The Interest Rate Algebra

Yuriy V Kozyr*

Department of Theoretical Economy and Mathematic Research, Central Economics and Mathematics, Institute of Russian Academy of Sciences, Moscow, Russia

*Corresponding Author:
Yuriy V Kozyr
Department of Theoretical Economy and Mathematic Research
Central Economics and Mathematics
Institute of Russian Academy of Sciences
Moscow, Russia
Tel: +7 (495) 924-3276
Fax: +7(495) 779-1324
E-mail: [email protected]

Received date: January 02, 2017; Accepted date: January 16, 2017; Published date: January 22, 2017

Citation: Kozyr YV (2017) The Interest Rate Algebra. Bus Eco J 8:286. doi: 10.4172/2151-6219.1000286

Copyright: © 2017 Kozyr YV. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

 

Abstract

This article considers the structure of interest rate, applied for discounting of risky cash flows. The purpose of the article is a presentation of ways of reflecting inflation and risks in the calculation of risk discount rate. In introduction on base of well-known dependences is shown that risk premium depends on inflation rate and (for multiplicative-type models) risk free rate. In the first part of the article three Interest rate algebras are presented. They describe the attitude between nominal discount rate, risk free rate, inflation rate and risk-premium. This algebras can presents in additive-type or multiplicative-type versions and have given risk premium value without detailed description the structure of risk premium. The second part of the paper has more detailed attitude between risk premium, risk free rate and mathematical expectation of losses because of bankruptcy/default. It is shown that the obtained dependences are slightly different and depends on the initial preconditions calculation: the principle of arbitration or the principle of certainly equivalent.

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