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Fixed Income Markets

This article discusses fixed-income markets and introduces learning algorithms to predict them. It begins with an overview of bond basics like maturity dates and terminology. A table shows current interest rates for bonds maturing in 1-3 years, including zero-coupon bond yields and prices, one-year implied forward rates, par coupon rates, and continuously compounded zero yields. The article notes that US government bonds have standard maturity dates of 3 months, 6 months, 1 year, 2 years, 5 years, 10 years, or 30 years, and are called bills, notes, or bonds depending on maturity.

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48 views2 pages

Fixed Income Markets

This article discusses fixed-income markets and introduces learning algorithms to predict them. It begins with an overview of bond basics like maturity dates and terminology. A table shows current interest rates for bonds maturing in 1-3 years, including zero-coupon bond yields and prices, one-year implied forward rates, par coupon rates, and continuously compounded zero yields. The article notes that US government bonds have standard maturity dates of 3 months, 6 months, 1 year, 2 years, 5 years, 10 years, or 30 years, and are called bills, notes, or bonds depending on maturity.

Uploaded by

saeed14820
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Fixed-Income Markets

Saeid Hajizadeh

January 13, 2017

Summary
In this article, we try to touch and study the fixed-income market. We will then try to use Spline Curve
estimation and will introduce some learning algorithms to predict fixed-income markets.

1 Interest Rate Terminology


Suppose we want to find out the value of investing $1 in a year from today to receive $2 in two years from
today. To this matter, we must study and take a look at interest rates and how to interpret them. The key
is to find the present value of any investment in any given asset at a given time in future (or on today). We
begin this article with an introduction to bond basics.

1.1 Bond Basics


Table 1.1 provides information about current interest rates for bonds maturing in 1 to 3 years. The infor-
mation on each column is equivalent to the other columns.

(1) (2) (3) (4) (5)


Years to Zero-Coupon Zero-Coupon One-Year Par Continuously
Maturity Bond Yield Bond Price Implied Forward Coupon Compounded
Rate Zero Yield
1 6.00% 0.943396 6.00000% 5.82689%
2 6.5 0.881659 7.00236 6.48423 6.29748
3 7.00 0.816298 8.00705 6.95485 6.76586

Generally speaking, the maturities can be any date from now but US government only issues Treasury
Securities that have 3, or 6 months or 1, 2, 5, 10, or 30 years to maturity. The nomenclature is if the
securities is issued with a maturity less than a year, it is called Treasury Bills. If it has been issued at
par value and has maturity less than 10 years it is Treasury Notes and if it has been issued at par value
the maturity is more than 10 years it is called bonds. We do not distinguish between them and call them
all as bonds. The most recently issued treasury bonds are called on-the-run and other bonds are called
off-the-run. Generally speaking, on-the-run bonds have lower yields and are traded at a greater volume.
There are, in addition to government bonds, STRIPS (Separated Trading of Registered Interest and Principal
of Securities) that are a claim to a single interest payment or the principal portion of the government bond.
STRIPS are zero-coupon bonds as they only make one payment at maturity.
For any interest we must log: the date the rate is quoted, the period of time over which the rate is prevailed.
Let rt (t1 , t2 ) be the interest rate quoted at time t and which starts at time t1 and ends at time t2 . If t = t1 ,
the subscript will br dropped.

1
Zero-Coupon Bonds

References

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