5.1.BKM Ch 15

• Plot of yields on various bonds against the time to maturity
• Pure yield curve: yields on zero-coupon bonds. Use interpolation for large maturities
• On-the-run yield curve: use yields of coupon bonds. Relies primarily on the most recently issued treasury bonds

• Short rate: interest rate for a specified time interval = r_i
• Spot rate: yield today on a zero coupon bond w/ specified maturity
• Forward rate: future short rate

Relationship between various spot rates

What investors care about is their expected yield from various investments: E(r_i) = f_i

Term structure merely reflects whether there exists more long term or short term investors

Different borrowers & lenders have different preferences for short, medium, or long-term investment

• Buy short term zero coupon bond (receive X)
• Sell long term zero coupon bond (repay X + forward)