The Theory of the Term Structure of Interest Rates

Felix Geiger

Chapter Chapter 3 in The Yield Curve and Financial Risk Premia, 2011, pp 43-82 from Springer

Abstract: Abstract It is of essential interest to define a common financial arithmetic as to how to calculate the price of an asset.Asset prices are typically calculated according to the net present value approachwith market prices being valued by the expected discounted payoffs generated by the assets. Zero-coupon bonds should be used as a starting point. This Section only applies bond prices and yields on default-risk-freezero-coupon bonds. A zero-coupon bond is a bond that has a single fixed payment (“principal” and usual fixed to 1) at a given date (“maturity”). It guarantees the holder of the discount bond to get the principal at the maturity date. There are no intervening coupon payments and consequently, the bond sells less than the principal before the maturity date n. It holds that n: = T − twith Trepresenting the maturity date.

Keywords: Interest Rate; Term Structure; Yield Curve; Excess Return; Forward Rate (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-642-21575-9_3

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DOI: 10.1007/978-3-642-21575-9_3

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