Spot- discount forward
- Thread starter fashepard
- Start date
Hi Frank,
I added that cell, at the risk of another item, to show that the yield (YTM) is different from, but totally compatible with, spot rate and forward rate curve.
The yield to maturity is the I/Y (IRR) that you get when pricing yield with the calculator: it's the rate that, if all FV cash flows are discounted at, will produce a (model) value equal to the (market) bond price.
So, i hope this XLS is instructive b/c several of the rate concepts are illustrated at once:
1. you can start with a spot rate curve
2. each spot can be translated into discount factors (set of discount factors = discount function)
3. the spot rate curve can be used to infer the forward rate curve
4. Given either the spot/forward curve, the bond price can be calculated
5. Given the bond price, the yield (YTM) can be calculated
Finally, the spot and forward curve are sets of rates; e.g., they may slope upward
but the yield/YTM is a single rate for all maturities: it is a flat horiztonal line
But it's the flat rate line that corresponds to (give the same price as) the reality-based spot/forward curves.
David
I added that cell, at the risk of another item, to show that the yield (YTM) is different from, but totally compatible with, spot rate and forward rate curve.
The yield to maturity is the I/Y (IRR) that you get when pricing yield with the calculator: it's the rate that, if all FV cash flows are discounted at, will produce a (model) value equal to the (market) bond price.
So, i hope this XLS is instructive b/c several of the rate concepts are illustrated at once:
1. you can start with a spot rate curve
2. each spot can be translated into discount factors (set of discount factors = discount function)
3. the spot rate curve can be used to infer the forward rate curve
4. Given either the spot/forward curve, the bond price can be calculated
5. Given the bond price, the yield (YTM) can be calculated
Finally, the spot and forward curve are sets of rates; e.g., they may slope upward
but the yield/YTM is a single rate for all maturities: it is a flat horiztonal line
But it's the flat rate line that corresponds to (give the same price as) the reality-based spot/forward curves.
David
felmasri,
There is a color-coded version on the member page, that generally replicates Tuckman 7.1 (each of the four key rates has a different color):
http://www.bionicturtle.com/premium/editgrid/2008_frm_bonds_key_rate_shift/
Let me know if you have any questions....
David
There is a color-coded version on the member page, that generally replicates Tuckman 7.1 (each of the four key rates has a different color):
http://www.bionicturtle.com/premium/editgrid/2008_frm_bonds_key_rate_shift/
Let me know if you have any questions....
David
Similar threads
