5.1.BKM Ch 15

  1. Yield curve
    • 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
  2. Short, Spot, and Forward rates
    • Short rate: interest rate for a specified time interval = ri
    • Spot rate: yield today on a zero coupon bond w/ specified maturity
    • Forward rate: future short rate
  3. Term structure
    Relationship between various spot rates
  4. Expectation hypothesis
    What investors care about is their expected yield from various investments: E(ri) = fi
  5. Liquidity Preference theory
    Term structure merely reflects whether there exists more long term or short term investors
  6. Segmentation theory
    Different borrowers & lenders have different preferences for short, medium, or long-term investment
  7. How to lock-in a forward rate
    • Buy short term zero coupon bond (receive X)
    • Sell long term zero coupon bond (repay X + forward)
Card Set
5.1.BKM Ch 15