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Zero coupon bonds
Terms in this set (13)
What is a zero coupon bond?
A bond that pays no coupons. It only pays the face value on the maturity date.
So due to this, what do sellers have to do in order to sell them to the public?
Sellers of zero coupon bonds have to offer them at a deep discount in order to sell them to the public.
What are zero yields?
Zero yields are the interest rates that we earn on zeros.
How can we use zero yields?
To price zeros of corresponding maturities.
It is a common understanding that what will happen when you lend your money for a short period?
It is a common understanding that when you lend your money for a short period, you will get a lower rater of interest than when you lend money for a longer period of time.
What is the par yield curve?
A curve of par yields plotted against maturities.
What is the zero yield curve?
A curve of zero yields plotted against maturities.
-The x-axis corresponds to maturities
-The y-axis corresponds to interest rates or yields
What is the zero yield curve also called?
It is also called the term structure of interest rates
What is the most common shape for the zero yield curve?
The most common shape is upward sloping. However, there have been times when we had hump-shaped yield curves where interest rates are highest for medium maturities and low for very short and very long maturities.
What is the important point to take away from a zero yield curve?
The important point to take away from a zero yield curve is that interest rates or yields are different from maturity to maturity.
What are zero coupon instruments?
T-bills and STRIPS
(best thing to do is to implement the bootstrapping technique)
What does STRIPS stand for?
Separate Trading of Registered Interest and Principle of Securities
What does STRIPS do?
The government tracks ownership details in their book-entry system. STRIPS zeros are direct obligations of the government.
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