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Yield Curve Arbitrage

Economics, Financial Management, Financial Markets, Fixed Income Securities

This lesson is part 9 of 25 in the course Financial Theory - Video Series

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.

Source: open Yale Courses

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In this Course

  • Why Finance?
  • Utilities, Endowments, and Equilibrium
  • Computing Equilibrium
  • Efficiency, Assets, and Time
  • Present Value Prices and the Real Rate of Interest
  • Irving Fisher’s Impatience Theory of Interest
  • Shakespeare’s Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance
  • How a Long-Lived Institution Figures an Annual Budget Yield
  • Yield Curve Arbitrage
  • Dynamic Present Value
  • Financial Implications of US Social Security System
  • Overlapping Generations Models of the Economy
  • Will the Stock Market Decline when the Baby Boomers Retire?
  • Quantifying Uncertainty and Risk
  • Uncertainty and the Rational Expectations Hypothesis
  • Backward Induction and Optimal Stopping Times
  • Callable Bonds and the Mortgage Prepayment Option
  • Modeling Mortgage Prepayments and Valuing Mortgages
  • Dynamic Hedging
  • Dynamic Hedging and Average Life
  • Risk Aversion and CAPM
  • The Mutual Fund Theorem and Covariance Pricing Theorems
  • Risk, Return, and Social Security
  • Leverage Cycle and the Subprime Mortgage Crisis
  • Shadow Banking: Parallel and Growing?

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