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11 Cards in this Set

  • Front
  • Back

Spot yield curve X and y

Discount factor

Discount function

Graph of rate against period

Today's rate if 1dollar to be received in different period ( 6 months, or 1 year and so on. )

Discount factor and spot rate mapping for different period

Forward curve

3 yr loan starting at t2

F for price ( calculate by discount factor),

f for rate

Rate. .. r ( t,1) against period ,

If spot curve is upward sloping then forward curve will be upward sloping

Cube root of (1+r2)(1+r3)(1+r4)

If forward rate given spot rate

Eg: 3 √ r3,1;, r4,1,;5,1

Forward rate model

Relation btw spot curve and forward rate curve

Find spot if series of fwd rate given

Spot price is a geometric mean

Yield to maturity against spot rates

Weighted avg

Ytm is expected return?

Expected return is not ytm, it's calculation is annualised hpr


Annualised hpr

End - original/ original. Fv- PV/PV

(1+hpr) power nth root of no of years ie 1/t.

f(1,1) > r(2)

f(1,2) > f(1,1)

,In eg it's year fwd

If r(30) then max fwd is f(4,26)

Why yield and price are inverse in relationship ??

riding the yield curve

Wider the spread , longer the bond, greater the total return.