Abstract

This chapter discusses the yield curve, which is an important indicator and knowledge source of the state of a debt capital market. Uses of the yield curve include the setting of the yield for all debt market instruments, acting as an indicator of future yield levels, measuring and comparing returns across the maturity spectrum, indicating relative value among different bonds of similar maturity, and pricing interest-rate derivative securities. The most commonly occurring yield curve is the yield to maturity yield curve. Other types of yield curves that can be constructed include the coupon yield curve and par yield curve. The coupon yield curve is a plot of the yield to maturity against the term to maturity for a group of bonds with the same coupon. The par yield curve plots the yield to maturity against the term to maturity for current bonds trading at par. Most transactions in the market are for immediate delivery, which is known as the cash market, although some markets also use the expression “spot market,” which is more common in foreign exchange.

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