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Unformatted text preview: duration vector Since we have many points on the spot curve, we should probably select some key rates. Ho (1992) focuses on 11 key spot rates: 3 month, lV, 2Y, 3Y, 5Y, 7Y, lOY, 15Y, 20Y, 25Y, 30Y. Use same method: P p+ 2(Po)(Llr) 9 • • • Spot Curves & Trees FIN 428 Prof. Hood Term Structure Models The term structure has expectations and risk premia built in, We can model the term structure mathematically with uncertainty or not. In some cases uncertainty is important, in others it is not. For pricing purposes, we can ignore uncertainty or combine the expectations and risk premia together. Methods:Curve fitting with no uncertaintyBinomial trees (acids volatility) Stochastic processes  many different forms Sources for Rates On the run Treasuries Off the run Treasuries (STRIPS & PSTRIPS 3 possible scenarios for N unknown spots:Less than N pricesN prices More than N Prices 1...
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 Fall '11
 Hood
 Interest Rates, Financial Markets, Interest, Internal rate of return

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