What is the term structure of interest rates ?
The yield curve is the relation between the interest rate (or cost of borrowing) and the maturity of the debt for a given borrower in a given currency. For example, the current euro interest rates paid on euro-denominated government bonds for various maturities are commonly plotted on a graph such as the one below which is informally called “the yield curve.” More formal mathematical descriptions of this relation are often called “the term structure of interest rates”. The yield of a debt instrument is the annualized percentage increase in the value of the investment. For instance, a bank account that pays an interest rate of 4% per year has a 4% yield. In general the percentage per year that can be earned is dependent on the length of time that the money is invested. For example, a bank may offer a “savings rate” higher than the normal checking account rate if the customer is prepared to leave money untouched for five years. Investing for a period of time t gives a yield Y(t). This fu
The term structure of NSE Zero Curve (NSE Zero Curve for short) is a relationship between maturity and interest rates. The NSE Zero Curve starts from the basic premise of time value of money that a given amount of money today has a value different from the same amount due at a future point of time. An individual willing to part with his money today has to be compensated in terms of a higher amount due in future in other words, he has to be offered a positive rate of return on the principal amount. The rate of interest to be paid would vary with the time period that elapses between today (when the principal amount is being foregone) and the future point of time (at which the amount is repaid). At any point of time therefore, we would observe different rates of interest associated with different terms to maturity; longer maturity offering a term spread relative to shorter maturity. The term structure of interest rates, or NSE Zero Curve, is the set of such spot interest rates. This is th
The ‘term structure of ‘zero coupon yield curve’ (ZCYC for short) is a relationship between maturity and interest rates. The ZCYC starts from the basic premise of ‘time value of money’ – that a given amount of money today has a value different from the same amount due at a future point of time. An individual willing to part with his money today has to be compensated in terms of a higher amount due in future – in other words, he has to be offered a positive rate of return on the principal amount. The rate of interest to be paid would vary with the time period that elapses between today (when the principal amount is being foregone) and the future point of time (at which the amount is repaid). At any point of time therefore, we would observe different rates of interest associated with different terms to maturity; longer maturity offering a ‘term spread’ relative to shorter maturity. The term structure of interest rates, or ZCYC, is the set of such spot interest rates. This is the principa
