Discounting Before the Crisis

Abstract

The main ingredient for pricing is the zero curve r(t) which assigns an interest rate to any given maturity t > 0. It tells us what the value of 1 currency unit will be at time t if invested at the risk-free rate. For most theoretical applications, the zero rate is expressed as continuously compounding, so the value at time t will be given by

$$V\left( t \right)=\exp \left( {r\left( t \right)t} \right).$$