Reading 55: The Term Structure of Interest Rates: Spot, Par, and Forward Curves

Book 3: Fixed Income

In normal bond pricing, what does the YTM assume?

the discount rate for every future cash flow is the same

this is not true

Spot Rate/Zero Rate

discount rates for a ginle payment to be received

How can Spot Rates be observed?

zero-coupon bonds

Spot Curves

displays the spot rates vs maturity for a particular security or issuer

No Arbitrage Price

the price derived from spot rates

Par Yield

reflects the coupon rate that a hypothetical bond at each maturity would need to have to be priced at par given a spot curve

Describe the 0y0y convention

first number ==> future period in which the loan starts

second number ==> how long the loan lasts for

What is the key idea of forward rates?

borrowing for n years at the n-year spot rate and borrowing for one-year periods for n successive periods cost the same