| Financial Toolbox | |
For the well-known algorithms and formulas used in the Financial Toolbox (such as how to compute a loan payment given principal, interest rate, and length of the loan), no references are given here. The references here pertain to less common formulas.
Bond Pricing and Yields
The pricing and yield formulas for fixed-income securities come from:
Mayle, Jan. Standard Securities Calculation Methods. New York: Securities Industry Association, Inc. Vol. 1, 3rd ed., 1993, ISBN 1-882936-01-9. Vol. 2, 1994, ISBN 1-882936-02-7.
In many cases these formulas compute the price of a security given yield, dates, rates, and other data. These formulas are nonlinear, however; so when solving for an independent variable within a formula, the Financial Toolbox uses Newton's method. See any elementary numerical methods textbook for the mathematics underlying Newton's method.
Term Structure of Interest Rates
The formulas and methodology for term structure functions come from:
Fabozzi, Frank J. "The Structure of Interest Rates." Ch. 6 in Fabozzi, Frank J. and T. Dessa Fabozzi, eds. The Handbook of Fixed Income Securities. 4th ed. New York: Irwin Professional Publishing. 1995. ISBN 0-7863-0001-9.
McEnally, Richard W. and James V. Jordan. "The Term Structure of Interest Rates." Ch. 37 in Fabozzi and Fabozzi, ibid.
Das, Satyajit. "Calculating Zero Coupon Rates." Swap and Derivative Financing. Appendix to Ch. 8, pp. 219-225. New York: Irwin Professional Publishing. 1994. ISBN 1-55738-542-4.
Derivatives Pricing and Yields
The pricing and yield formulas for derivative securities come from:
Chriss, Neil A., "Black-Scholes and Beyond: Option Pricing Models," Chicago: Irwin Professional Publishing. 1997. ISBN 0-7863-1025-1.
Cox, J.; S. Ross; and M. Rubenstein, "Option Pricing: A Simplified Approach", Journal of Financial Economics 7, Sept. 1979, pp. 229 - 263
Hull, John, C. Options, Futures, and Other Derivative Securities. Englewood Cliffs, NJ: Prentice-Hall. 2nd ed., 1993, ISBN 0-13-639014-5.
Portfolio Analysis
The Markowitz model is used for portfolio analysis computations. For a discussion of this model see Chapter 7 of:
Bodie, Zvi, Alex Kane, and Alan J. Marcus. Investments. Burr Ridge, IL: Irwin. 2nd. ed., 1993, ISBN 0-256-08342-8.
To solve the quadratic minimization problem associated with finding the efficient frontier, the toolbox uses the fmincon function (finds the constrained minimum of a function of several variables) in the MATLAB Optimization Toolbox. See that toolbox documentation for more details.
Other References
Addendum to Securities Industry Association, Standard Securities Calculation Methods: Fixed Income Securities Formulas for Analytic Measures, Vol. 2, Spring 1995. This addendum explains and clarifies the end-of-month rule.
Brealey, Richard A., and Stewart C. Myers. Principles of Corporate Finance. New York: McGraw-Hill. 4th ed., 1991, ISBN 0-07-007405-4.
Daigler, Robert T. Advanced Options Trading. Chicago: Probus Publishing Co. 1994, ISBN 1-55738-552-1.
A Dictionary of Finance. Oxford: Oxford University Press. 1993, ISBN 0-19-285279-5.
Fabozzi, Frank J., and T. Dessa Fabozzi, eds. The Handbook of Fixed-Income Securities. Burr Ridge, IL: Irwin. 4th ed., 1995, ISBN 0-7863-0001-9.
Fitch, Thomas P. Dictionary of Banking Terms. Hauppauge, NY: Barron's. 2nd ed., 1993, ISBN 0-8120-1530-4.
Hill, Richard O., Jr. Elementary Linear Algebra. Orlando, FL: Academic Press. 1986, ISBN 0-12-348460-X
Marshall, John F., and Vipul K. Bansal. Financial Engineering: A Complete Guide to Financial Innovation. New York: New York Institute of Finance. 1992, ISBN 0-13-312588-2.
Sharpe, William F. Macro-Investment Analysis. An "electronic work-in-progress" published on the World Wide Web, 1995, at
http://www.stanford.edu/~wfsharpe/mia/mia.htm.
Sharpe, William F., and Gordon J. Alexander. Investments. Englewood Cliffs, NJ: Prentice-Hall. 4th ed., 1990, ISBN 0-13-504382-4.
Stigum, Marcia, with John Mann. Money Market Calculations: Yields, Break-Evens, and Arbitrage. Burr Ridge, IL: Irwin. 1981, ISBN 0-87094-192-5.
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