Financial Product Knowledge

A financial market is a market where people trade financial products. Typical financial markets are money market, fixed income market, interest rate market, foreign exchange market, equity market, commodity market and credit market.

Financial market provides a public place for participants to trade fairly. It allows people to invest their money or acquire capital or offset risk. The price of any goods and services is derived according to the basic principle of demand and supply, that reflects all available information about the traded item. Financial markets play a vital role in economy

An interest rate derivative is a financial contract between two parties to exchange interest rate related future payments over a set of future times. The payments are derived from an underlying interest rate. Derivatives in interest rate markets bear interest rate risk that is the risk arising due to interest rate fluctuation. Interest rate risk is an important part of market risk

Fixed income and interest rate markets mainly consists of bonds, notes, debentures, certificates, mortgages, money market funds and interest rate derivatives.

To price any interest rate related product, one needs to calculate accrued interest. There two factors that determine accrued interest: compounding and day count.

Reference