{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}


term_stru_summary - U NIVERSITY OF E SSEX D EPARTMENT OF E...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
U NIVERSITY OF E SSEX D EPARTMENT OF E CONOMICS Term Structure of Interest Rates Yield curves Yield curves show the relationship between spot yield and time to maturity (i.e. ‘life’) of a bond. Spot yield : y n,t ( m/p n,t ) (1 /n ) - 1 is the yield to maturity on a Zero Coupon (pure discount) bond with life n at date t , where p n,t is the market price of the bond at date t and m is its face value. From now on all bonds are assumed to be Zero Coupon. Theories of the term structure seek to explain the shape of the yield curve at each date. Implicit forward rates Implicit forward rates are future yields (interest rates) implied by today’s observed bond yields. Define n - 1 f n as the implied rate between dates n - 1 and n as of today, t : (1 + y n - 1 ) n - 1 (1 + n - 1 f n ) = (1 + y n ) n (1) All the above are defined as of today, i.e. should have an extra t subscript. The term structure (yield curves) can equivalently be expressed using implicit forward rates, rather than spot yields.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}