Yield Curves

Investors will look at individual bond Yield-Curves as well as the general market yield curve.
This type of analysis is known as "relative value" analysis.
All investors will have a specific risk/reward profile they are looking for and Yield-Curves help them find it.
This describes the relationship between a particular maturity date and the corresponding yield (or interest rate).
This is the relationship between the cost of borrowing and time.
It is important that only bonds from the same class of issuer or with the same degree of liquidity, same coupon rate and same features are used to plot the yield curve.
The vertical axis shows the annual interest rate available in the market.
The horizontal axis shows the time of the investment.
A yield curve is the line connecting the interest rate that can be earned for different periods of time.
A yield curve is the graphical representation of the relationship between the interest rate on a particular class of security against time to maturity.


Annual Percentage Rate method ???


The spread is the difference between the yield on a long term bond and a short term bond


Importance of Yield-Curves

Swap valuations uses the zero coupon yield curve and forward rates.
Zero coupon rates are used to calculate discount factors while forward rates are used to forecast floating payments of the swap.


Separate Yield-Curves exist for:
Interbank lending/borrowing rates
Yields on government bonds (bills & note)


Relative Value Analysis

This is the process when investors compare a corporate bond yield curve to the US Treasury yield curve to determine if a bond is worth buying
All investors have a specific risk/reward profile that they are comfortable with and a bonds yield relative to its perceived risk will influence whether they buy or sell


Parallel Shift
Steepness
Curvature
Spread


Par swaps are used to construct yield curves


Factors Affecting Yield-Curves

Inflation
Supply / Demand
Liquidity Desires
The most important factor affecting a yield curve is the currency in which is denominated.
The ecomonic situation in that country is also very important.


Discount Curves - extract discount rates to "value" cashflows
Old Curve - uses specific instruments and bootstrapping
New Curve - uses market observables. Define the curve using discount factors at certain dates. Fits the curve to the market


The yield to maturity of a bond is the most frequently used measure for indicating the interest rate when you hold a bond to maturity.


Important

Yields are normally measured with continuous compounding interest.
When you compare two yield curves you get a yield spread.


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