Mastering Attribution in Finance

7

Yield curves in attribution

7.1 Introduction

7.2 Why interest rates vary by term

7.3 Interpolation

7.4 Par curves and zero curves

7.5 Credit spreads

7.1 INTRODUCTION

So far, I have talked about interest rates as if each bond’s cash flows can be discounted at a single rate. In fact this is seldom the case, and the ramifications of interest rates varying by term (or borrowing period) form one of the core topics of fixed income attribution.

7.2 WHY INTEREST RATES VARY BY TERM

Suppose you run a bank, and have two clients who are identical in every way. One client wants to borrow £1 million from you for a period of a week. The other wants to borrow £1 million for 10 years. Does it make sense to charge them both the same rate of interest? ...