Study Session 14 - The Term Structure and Interest Rate Dynamics

Question 0

The expected return will be equal to the bond’s yield when…

Answer 0

the bond is held to maturity
AND
All payment are made on time and in full
AND
All coupons are reinvested at the original YTM

Question 1

Forward rates notation

f(j,k)

Answer 1

the annualized interest rate applicable on a k-year loan starting in j years

Question 2

Forward pricing model page 142

Answer 2

P_(j+k)=P_jF_(j,k)

therefore

F_(j,k)= P_(j+k)/P_j

Question 3

Forward rate model

Answer 3

[1+S_(j+k)]^(j+k) = (1+S_j)^j * [1+f_(j,j))]^k

Question 4

Relationship between spot and forward rates

Answer 4

(1+S_T)^T = (1+S_1)[1+f(1,T-1)]^(T-1)

Question 5

Swap rate curve

Answer 5

Sommation(SFR_T/(1+S_t)^t) + 1/(1+S_T)^T = 1

on isole SFR_T

voir page 149 volume 4

Question 6

Swap spread

Answer 6

swap rate_t - Treasury yield_t

Question 7

I-Spread

Answer 7

amount by which the yield on the risky bond exceeds the swap rate for the same maturity.

linear interpolation if no similar maturity

Question 8

Z-Spread

Answer 8

is the spread that, when added to each spot rate on the default-free spot curve, makes the present value of a bond’s cash flows equal to the bond’s market price

ex: 104,12$= 8$/(1+0.04+Z) + 108$/(1+0.05+Z)^2

we’re looking for Z—> Z=0.008

Question 9

TED spread

Answer 9

is the amount by which the interest rate on loans between banks (3 months LIBOR) exceeds the interest rate on short-term U.S. government debt (3 months T-Bills)

Question 10

TED spread is a good indicatir for?

Answer 10

indication of the risk of interbank loans

Question 11

LIBOR-OIS spread

OIS: overnight indexed swap

Answer 11

is the amount by which the LIBOR rate (which includes credit risk) exceeds the OIS rate (which includes only minimal credit risk)