9. Yield Curve Arbitrage

Financial Theory (ECON 251)

Where can you find the market rates of interest (or equivalently the zero coupon bond prices) for every maturity? This lecture shows how to infer them from the prices of Treasury bonds of every maturity, first using the method of replication, and again using the principle of duality. Treasury bond prices, or at least Treasury bond yields, are published every day in major newspapers. From the zero coupon bond prices one can immediately infer the forward interest rates. Under certain conditions these forward rates can tell us a lot about how traders think the prices of Treasury bonds will evolve in the future.

00:00 - Chapter 1. Defining Yield
09:07 - Chapter 2. Assessing Market Interest Rate from Treasury Bonds
35:46 - Chapter 3. Zero Coupon Bonds and the Principle of Duality
50:31 - Chapter 4. Forward Interest Rate
01:10:05 - Chapter 5. Calculating Prices in the Future and Conclusion

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Fall 2009.