25556 Chapter Notes - Chapter 12: Interest Rate, Yield Curve, Spot Contract
Document Summary
Term structure of interest rates - set of interest rates for a class of assets for a range of terms. Three generalised yield curve shapes: normal - slopes upward because shorter term rates are lower than longer term rates, inverse - slopes downward because anger term rates are lower than shorter term rates, falt - horizontal curve. Yields curves are constructed from the yields on traded securities. The securities need to have little or no credit and liquidity risk, babs and treasury bonds are used. Yields need to be calculated on single payment instrument such as babs, bonds need to be stripped of their coupons. Spot interest rates are the current rate of interest: Such as the yield on a trade in babs, or zero-coupon bonds. The term of the spot rate is given by the security"s term to maturity. Forward interest rate commences at a future date and extends to a speci ed term:
