The Evolution of Short Rates and the Shape of Term Structure
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About the Lecture
The lecture The Evolution of Short Rates and the Shape of Term Structure by Edu Pristine is from the course Archiv - Market Risks. It contains the following chapters:
- Expectations of Interest Rates
- Interest Rate Volatility & Convexity
- Convexity & Time to Maturity
- Convexity & Volatility
- Risk Premium for Risk Averse Investors
Author of lecture The Evolution of Short Rates and the Shape of Term Structure
Edu Pristine
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Excerpts from the accompanying material
... interest rates, the yield curve can take on strange shapes. The yield curve may be Flat, Upward sloping, Downward sloping, or partially both. While this relationship changes over time, there are three commonly occurring yield curve shapes: Normal, Inverted and Humped. Based on forward rate expectations i.e., future interest rate expectations ...
... sloping yield curve - Scenario III: Downward Sloping Yield Curve - 1 year interest rate = 9% and 1 year forward rates are 8% & 7% for future 2 years Price of 1 year ZCB = $100/(1.09) = 1/(1+r(1)) r(1) = 9% Price of ...
... assuming two possibilities for interest rates which suggest volatility of interest rate. At each time period, expected interest rate is 8% ...
... volatility is called "Convexity" Convexity can be explained using Jensen's inequality ...
... following interest rate tree structure: Expected interest rate in each year = 8% - Using risk neutral pricing methodology, ...
... of bond all else being equal. As maturity of bond increases, the Price to yield curve relationship becomes more convex ...
... interest rated tree = $85.82 - This price results in a implied volatility spot rate = 7.94% - Convexity = 6bps ...
... depend on the volatility present which will ensure that investors get yield of more than 8% for bearing interest rate risk. Higher risk premium suggests high volatility of the underlying. Based on the risk premium, we can interpret if the underlying volatility has increased ...
