0
$\begingroup$

Suppose at different maturities (e.g., 1 year from now, 2 years from now, 3 years from now, etc.), the price of a STRIP security is consistently decreasing as the maturity increases all else held constant.

Then, what kind of slope would the yield curve have?

$\endgroup$
3
$\begingroup$

This is a pretty basic finance question.

Strips are discount bonds so their price is basically a discount factor and the fact that the price is decreasing with maturity, on its own, is not enough information to determine the slope of the yield curve.

Here is a simple example of 3 yield curves (flat, upward sloping and downward sloping) that will all have decreasing discount factors (strip prices):

import matplotlib.pyplot as plt
import pandas as pd
import numpy as np

zeros = pd.DataFrame({
    'A': [0.5, 0.5, 0.5, 0.5],
    'B': [0.5, 0.6, 0.7, 0.8],
    'C': [0.5, 0.45, 0.4, 0.35]
}, index=range(1,5))

strips = zeros.apply(lambda x: np.exp(-x / 100 * zeros.index))
fig, ax = plt.subplots(1, 2, figsize=(8,4))
zeros.plot(marker='o', ax=ax[0], title="Zero Rates")
strips.plot(marker='o', ax=ax[1], title="Discount Factors");

enter image description here

$\endgroup$
0

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.