To price a convertible, the queen of the capital structure from a pricing point of view, you need to know about volatility, credit, rates. Indeed, to price volatility you need rates. And likewise with credit. So it all points back to rates. Which is why I decided to start with looking at simple rates products - certificates of deposit, then on to treasuries. But while looking at CDs, I decided to strip it down to the basic question 'what is a rate?'
Given that the maths associated with rates is uncontroversial, and has been around for centuries, I guess most people don't spend a long time here. But I want to. I want to feel what a rate means. So I invented the 'a man walks into a bar' story to give me space to spell out the elements. I also have in my mind a slow-camera zoom of rates contexts, starting with macro-economic, then markets, then contractual, then participant based.
The biggest macro-economic variable which provides a context to rates is the likely inflation during the life of the loan. I'd now like to summarise this in a simplistic mathematical way.
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