INCREASING SPOT RATES OF INTEREST: STRUCTURE OF THE PRICE OF A DEFAULT FREE DISCOUNT BOND

Salvador Cruz Rambaud and María Del Carmen Valls Martínez ()
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María Del Carmen Valls Martínez: Departamento de Dirección y Gestión de Empresas, University of Almería, Spain

International Journal of Theoretical and Applied Finance (IJTAF), 2002, vol. 05, issue 03, 321-332

Abstract: This paper aims to establish a set of necessary and sufficient conditions that the expression of a default free bond must verify in a situation in which spot rates of interest increase. In this case, if the agent divides the period of his investment, that is, if he disinvests and, immediately, re-invests his capital in different issues of bonds, can obtain an advantage in the final amount. In order to do this, necessary conditions include an approximation of the forward interest rate, that is to say the logarithmic density, its limits to +∞ and -∞ and the second generalized derivative of the bond price. Sufficient conditions involve an auxiliary function using these limits and, finally, necessary and sufficient conditions are related with the logarithm of the bond price.

Keywords: Default free bond; spot rate; forward rate; rate of interest; logarithmic density (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S0219024902001456

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