Interest Rate Term Structures

  • Hans-Peter Deutsch
Part of the Finance and Capital Markets Series book series (FCMS)


Interest rate curves are constructed from the prices of bonds traded in the market. In order to construct the spot rate curve (also called spot rate term structure or term structure, for short), for example, the yields of zero bonds for all possible maturities are required. Observing an entire array of conditions in order to be consistent with the assumption of an arbitrage-free market, such an interest rate curve can be determined from market data characterizing traded interest rate instruments. Such market data are for instance prices of traded bonds (not necessarily zero bonds), spot rates, par rates, swap rates, etc. All of these variables can be traced back to a single common nucleus. If the market is arbitrage free (and assuming the same credit-worthiness for all cash lows involved) then for every value date t and maturity date T there exists a unique discount factor B R (t, T). If all possible discount factors are known, then the present value of every instrument or portfolio consisting of cash lows can be determined. Thus, the spot rate curve R(t, T) (which is nothing other than the yields of the discount factors B R (t, T)) has to be constructed in such a way that the observed market prices of interest rate instruments can be reproduced by discounting the future cash flows of the instruments using B R (t, T).


Discount Factor Term Structure Money Market Spot Rate Swap Rate 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Copyright information

© Hans-Peter Deutsch 2009

Authors and Affiliations

  • Hans-Peter Deutsch
    • 1
  1. 1.FrankfurtGermany

Personalised recommendations