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week 3 - Week 3 Tutorial Emily Lo Term structure of...

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Week 3 Tutorial Emily Lo
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Term structure of interest rates Structure of interest rates for discounting cash flows of different maturities Yield curve relationship of YTM as a function of time to maturity YTM internal rate of return set by the market of a bond held to maturity Spot rates YTM on zero coupon bond Forward rates inferred interest rates for an interval at different points in time from the term structure
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Inferring forward rates and spot rates Spot rates are geometric averages of forward rates 1 2 3 f(0,1) f(1,2) f(2,3) y(1) y(2) y(3) Spot rates Forward rates [1 y ( n )] n [1 f (0,1)] [1 f (1,2)] ... [1 f ( n 1, n )] [1 y ( n )] n [1 y ( n 1)] n 1 [1 f ( n 1, n )] f ( n 1, n ) [1 y ( n )] n [1 y ( n 1)] n 1
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Holding period Return Annualized rate of return of an investment for the holding period Used to compare alternative investments over the same
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week 3 - Week 3 Tutorial Emily Lo Term structure of...

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