The yield curve, and spot and forward interest rates Moorad …

The yield curve, and spot and forward interest rates Moorad Choudhry In this primer we consider the zero-coupon or spot interest rate and the forward rate. We also look at the yield curve. Investors consider a bond yield and the general market yield curve when undertaking analysis to determine if the bond is worth buying; this is a form of what is known as relative value analysis. All investors will have a specific risk/reward profile that they are comfortable with, and a bond's yield relative to its perceived risk will influence the decision to buy (or sell) it. We consider the different types of yield curve, before considering a specific curve, the zero-coupon or spot yield curve. yield curve construction itself requires some formidable mathematics and is outside the scope of this book; we consider here the basic techniques only.

P C rs M rs CDMD d t t t T T T tT t T = + + + + = = ∑ ∑ 1 11 1 = x x (4.1) where rst is the spot or zero-coupon yield on a bond with t years to maturity Dt ≡ 1/(1 + rst) t = the corresponding discount factor In 4.1, rs1 is the current one-year spot yield, rs2 the current two-year spot yield, and so on. Theoretically the spot yield for a particular term to maturity is the same as the yield

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  Yield, Curves, Yield curve

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