Finacial Economics
Universidad Carlos III de Madrid
Guillermo Suárez Vega
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Topic 2
1. Capitalization Laws
a) Simple 𝐶" = 𝐶$ ∗ (1 + 𝑟 ∗ 𝑛)
b) Compound 𝐶" = 𝐶$ ∗ (1 + 𝑟)"
c) Continuous 𝐶" = 𝐶$ ∗ 𝑒-∗"
Capitalization is taking the money to the future, actualizing or discounting is bringing the money
to the present.
2. Repeated coupons
a) Constant coupon (finite number) 𝑃𝑉 = 𝐶 ∗ 01 02- 34
-
b) Constant coupon (infinite number) 𝑃𝑉 = 5
-
c) Augmenting coupon (finite number) 𝑃𝑉 = 𝐶 ∗ 01 678
679
4
-1:
d) Augmenting coupon (infinite number) 𝑃𝑉 = 5
-1:
3. Transforming discount rates
a) 𝑟; = (1 + 𝐴𝑃𝑅) 6
> − 1
b) 𝐴𝑃𝑅 = (1 + 𝑟;); − 1
c) 𝑟; = -4@>
;
The financial formulas of repeated coupons actualize the money to the previous period of the
first pay.
Those coupons which start at 𝑡 = 0 (prepaid) have an adjustment of ∗ (1 + 𝑟).
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