Present value of ordinary annuity = PMT [{1-(1+i)-n} /i] Future value of ordinary annuity= PMT [{(1+i) n-1}/i] Present

value of due annuity = PMT [{1-(1+i)-n} /i] (1+i) Future value of ordinary annuity= PMT [{(1+i) n-1}/i] (1+i)

=PMT (

) ) ) )

= PMT ( =PMT (

= PMT (

Effective annual rate=

( m is the number of compounding in a year)

Finding forward rate:

0r1

and 0r2 are the spot rate 1r2 is the forward rate

Rate 0r1 0r2 0r3

1+ Spot Rate 1.0400 1.0696 1.0989

Rate 0r1 1r2 2r3

Spot/Forward Rates 0.04 0.10 0.16

The spot rates in the first table are the geometric averages of the spot/forward rates in the second table. To verify this, consider the general equation where t = 1 and T = 2:

This yields:

Or, by taking the square root of each side:

Similarly, the three year spot rate is the geometric average of the one-, two-, and three year spot and forward rates:

Total differential: dy= f1 dx1+ f2 dx2 +f3 dx3