2. Financial Instruments (2.1-2.2)

Treasury rate

Interest rate paid on government bonds; usually considered risk-free because governments are assumed not to default in their own currency.

Government bond

A debt security issued by a national government to borrow money from investors.

Risk-free

A financial asset with (almost) no chance of default; used as benchmark for pricing.

EURIBOR (European Interbank Offered Rate)

The interest rate at which European banks lend money to each other for short periods (e.g., 1m, 3m, 6m, 12m).

Quote (bank quote)

A price or interest rate that a bank offers in the market.

Not risk-free

An asset or interest rate that includes credit risk because the borrower could default.

Opportunity cost of capital

The return you could earn by using money in the next-best alternative investment.

ARR (Alternative Reference Rates)

New benchmark interest rates (e.g., SOFR, €STR, SARON) designed to be more reliable and less risky than old rates like LIBOR.

SOFR / €STR / SARON / SONIA / TONA

Risk-free overnight interest rates used in the US (SOFR), Eurozone (€STR), Switzerland (SARON), UK (SONIA), and Japan (TONA).

Overnight rate

An interest rate for lending money for one day.

Credit risk

The risk that a borrower will not repay debt.

Transaction-based

Calculated using actual trades in the market, not estimates or opinions.

Zero rate (zero-coupon rate)

Interest rate derived from a zero-coupon bond, which pays only one cash flow at maturity.

Zero-coupon bond

A bond that pays no coupon and only repays the face value at maturity.

Face value / Par value

The amount that will be repaid at maturity (usually 100 or 1,000).

• Linear interest ( simple interest): no compounding, you earn interest only on the initial amount

• Discrete compounding: interest is added at fixed intervals( Bsp: yearly), you earn interest only on the previous interest

• Continuous compounding: interest is added all the time, this gives the highest result, because it compounds constantly