Assumptions, mathmatical basics and goals
- Author:
- Christian Dorner
The process of modelling usually includes the translation of a real world problem to a mathematical problem. We start the modelling cycle by giving assumptions:
- We are credit-worthy for all appearing credits.
- There exist only four credits and one key interest rate $p$ (think of Euribor)
- Credit 1: The credit interest rate $p_1$ equals the key interest rate $p$ in every interest rate period.
- For convenience the interest rate period is one year.
- The key interest rate is variable, but constant over the whole credit term.
- The value of the instalments, the annuities, is constant over the whole credit term and accounts for 8 400 Euro. One pays such amounts in arrears. In other words, at first the debt level will be raised by interest rate and then it will be reduced by paying the annuity amount.
- We neglect all kind of charges and taxes related to the borrowing.