Understanding Term Structure of Interest Rates

Designed as a thought leader in understanding the term structure of interest rates, this publication is an excellent educative read for insightful academic knowledge about factors impacting the term structure of interest rates. Structured to enhance the pedagogy of fixed income valuation course on The middle Road, Term Structure of Interest Rates shares a formative understanding on this subject. First published under the previous The middle Road website under both Insights and Courses section, the read includes videos in calculating yield to maturity of bonds using spot rates. Term structure of interest rates remains one of the most important tools in the bond market for pricing fixed income securities. This educational note is a primer to have a better understanding on this subject.

The series on Term Structure of Interest Rates discusses the following topics

• Bonds Simplified: A brief overview of bonds which a look at yield, YTM (Yield to Maturity), yield curve and various types of yield curve
• Understanding price and yield relationship
• Overview and valuation of zero coupon bonds and deriving theoretical spot rate curve from the par yield curve
• Calculating price of the bonds using spot rates and YTM
• Understanding forward rates, calculating forward rates and much more

In the parlance of bond valuation spot rates have the utmost role as determinants of building blocks of understanding the term structure of interest rates. The price of the bond is the present value of the cash flows. The cash flows of bonds can be considered zero-coupon bonds. Zero-coupon bonds are not coupon securities but pay interest in the form of discounting the issue price to the face value. The yields of these zero-coupon bonds are also known as spot rates. Spot rates are discount rates of a Single Future Cash Flow like a zero-coupon bond.