Lecture 6

Impact of changes in yield on price of zero coupon

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Unformatted text preview: the impact of yield on price Financing a long term project with long or short term debt • I want to borrow to pay for a long term project • If I borrow long term, I can lock the “interest rate” (in reality the coupon payments) in now • If I borrow short term, I run the risk of having to pay a higher interest rate when I borrow again to “rollover” my short term debt Interest Rate Swaps as Insurance • Interest Rate Swap Notional amount used for computing size of payments • • • • The other side pays a floating rate (usually LIBOR) times the notional amount every period One side makes fixed payments (the swap rate times the notional amount) every period If I pay fixed and receive floating, I have bought insurance against having to pay higher short term rates in the future. 10 year swap rate and 3 month LIBOR...
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