CHAPTER 3The Yield Curve
“Raisuli, what shall we do? We have lost everything …”
“Sherif, was there never anything in your life for which it was worth losing everything for?”
—From The Wind and The Lion, MGM Films, Columbia Pictures, 1975.
This is probably the most important chapter in the book. Interest rates and the term structure of rates are the very foundation of modern principles of finance, yet this topic is not one that most senior bank executives are most au fait with. No doubt many of them would suggest that it is not an area they need to be technically expert in, but the fact remains that an understanding of the yield curve is fundamental to an understanding of the principles of finance.
The extracts in this chapter cover every aspect of interest rates, their term structure, spot and forward rates, dynamics of asset prices, fitting the curve, the secured curve, the multicurrency curve – everything but the kitchen sink, as they might say in 1940s Britain.
The new material in this book follows the book extracts, and ties in curve interpolation methodology with issues of relevance for the bank's internal funding or “funds transfer pricing” curve.
This extract from The Principles of Banking (2012)
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