VRM 10. Interest Rates

Learning Objectives

1) Calculate and interpret the impact of different compounding frequencies on a bond’s value.

2) Define spot rate and compute discount factors given spot rates.

3) Interpret the forward rate and compute forward rates given spot rates.

4) Define par rate and describe the equation for the par rate of a bond.

5) Interpret the relationship between spot, forward, and par rates.

6) Assess the impact of maturity on the price of a bond and the returns generated by bonds.

7) Define the “flattening” and “steepening” of rate curves and describe a trade to reflect expectations that a curve will flatten or steepen.

8) Describe a swap transaction and explain how a swap market defines par rates.

9) Describe overnight indexed swaps (OIS) and distinguish OIS rates from LIBOR swap rates.