7. The Maturity Structure of Interest Rates
i. define and compare the spot curve, yield curve on coupon bonds, par curve, and forward curve;
j. define forward rates and calculate spot rates from forward rates, forward rates from spot rates, and the price of a bond using forward rates;
What is a spot rate and what is a spot curve used for?
A spot rate is the yield on a zero-coupon bond. A series of spot rates (spot curve) can be used to discount the cash flows of a bond.
In regards to deriving default-free spot rates, what is bootstrapping?
Bootstrapping: the value of a Treasury coupon security should be equal to the value of the package of zero-coupon Treasury securities that duplicate the coupon bond's cash flows.
What is a par curve?
A par curve is a sequence of yields-to-maturity in which each bond is priced at par value.
What is a forward rate?
A forward rate refers to the interest rate on a loan beginning some time in the future.
What is a forward curve?
A forward curve is a series of forward rates, each with the same time frame.