# Questions tagged [interest-rates]

An interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor).

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### Bond strategy in rising rate environment

During a period of rising interest rates, it makes sense for investors to either swap out their longer term bonds for shorter ones, or simply invest in shorter maturity bonds in order to reduce ...
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### Difference between FRA and a zero coupon swap

Wanted to know the difference between an FRA and zero coupon swap with both legs having payment at maturity. If the zero coupon swap is forward starting, will it be equivalent to an FRA?
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### Investor rationale behind inverted yield curve

I just had a question regarding investors/markets rationale behind the cause of the yield curve. Assuming that investors believe that rates will be lower in the future and are pessimistic about the ...
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### Difference in utility of cap/floor and FRA

What is the difference in utility for cap/floor and FRA? To me their function looks very similar. Are they used for different objectives. One thing I know in difference is that the pay off for cap is ...
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### The Riccatti equation for The Cox-Ingerson-Ross Model

(My Question) I went through the calculations halfway, but I cannot find out how to calculate the following Riccatti equation. Please tell me how to calculate this The Riccatti equation with its ...
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### The Ho-Lee Model (1986)

(My question) I solved the following questions. However, if you know the other solutions, please let me know those along with computation processes. Besides, $W_t$ is a S.B.M. (Thank you for your ...
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### HJM in infinite dimensions

I recently started reading Filipovic's Consistency problems for HJM interest rate models and came across the Musiela reparametrization $$r_t(x)=f(t,x+t)$$ so the forward curve can be thought of as a ...
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### Banks' use of written interest rate options

I study US commercial banks data. I look at the notional amounts of their different OTC interest rate derivatives for the recent years. When I look at non-dealer banks (i.e. end-users), I find that ...
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### Relation between low rate and credit risk

In the Handbook of Fixed Incomes Securities, there is this part: The lower federal funds rate prods banks to be less aggressive in issuing deposits, such as certificates of deposits (CDs). Their ...
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### Stress testing fixed income Yield curve with Nelson Siegel

I am attempting to stress test the Zero coupon Yield curve using The Nelson Siegel model as described in the following papers : Generating Yield Curve Stress-Scenarios Representative Yield Curve ...
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i have a quick question about conversion factor and his implication in calendar bonds roll trading. I go short on a calendar roll (short front+long back) which has the same cheapest to deliver. The ...
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### How does one calculate the duration of a cash flow

The question reads: A firm has liabilities as follows: £2,910 at time t = 0 and £7,501 at time t = 4 (time is measured in years). On the asset side the firm has two payments, each for £5,000, at time ...
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### Does banks' profitability really suffer under low interest rates

It is always said that European banks suffer, amongst other things, from the low interest rate environment governing the Eurozone. And that in a rising interest rate environment, banks' profitability ...
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### Finding the redemption yield of a bond given a capital gains tax

Let's say a bond has a face value of £$100$ with semi-annual coupons at a rate of $3$% p.a which is redeemable at par in $10$ years. Assume an investor purchases the bond for £$92$ on the day it is ...
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### Can someone provide a good definitive explanation for rho in relation to option risks?

I have a pretty good understanding of option risks except for one thing, rho. Unfortunately, interest rates tend to have a small effect on option prices, and thus most literature tend to just gloss ...
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### Average interest rates by currency (Basel SRP98)

Can anybody confirm how the average interest rates by currency is calculated as per Basel SRP98? Please scroll down to 98.57 to see the table for different currencies. Step 1: generate a 16-year ...
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### Why does the ultra long-end of a yield curve invert?

The shape of the yield curve (at least in the GBP Rates market) is upward sloping from the front end up to the long end (i.e. 30y), but then begins to become downward sloping as we go beyond 30y and ...
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### How to understand interest rate bid/ask and apply client mark-up in Tom/Next Rollover Swap Point Calculation

When I am reading materials in swap point calculation for FX Tom/Next Rollover, I am confused with the market interest rate bid/ask. Using an example: I traded on ...
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### Why do higher interest rates increase the value of the currency?

I've been trying to study about interest rates and foreign exchange. First of all when people say interest rate in this context do they mean interest rate set by the central bank like federal reserve (...
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### Interest rate equation from bond price?

If a zero coupon bond price at time $t$, with maturity $T$ ($t<T$), is denoted by $B(t;T) = B(T;T) e^{(-\int_{t}^{T} r(s) ds)}$ where $r(t)$ is a known interest rate. How does this transform ...
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### stochastic interest rate in binomial pricing model and in continuous models

Is the interest rate allowed to be truly stochastic in the binomial pricing model and in continuous models so that we are still able to switch to the risk-neutral measure? Shreve mentions multiple ...
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### Stochastic process for interest rates allowing negative values

The Cox-Ingersoll-Ross process for the short term interest rate r(t) does not allow r(t) to become negative, but short-term rates are negative in much of the developed world. To account for this, do ...
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### Which curve does the interest rate risk fall in?

For example, Australian government issues a bond denominated in USD currency? Which curve does the interest rate risk fall in? Australian Gov Curve or USD Gov Curve?
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### Portfolio Values based on reference interest rates

How do I approach the following question? A portfolio has 100 million invested in equities. It has also transacted an interest rate derivative issued by counterparty X, which the value is 0 if the ...
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### Duration. Floating rate note

I don't understand why the duration of a floating rate note equal to the time to the next coupon payment? Please, look at my calculations. Here: P - is price at moment 0.
Assume a HJM framework with the same Brownian motion driving the dynamics for every tenor. $$df(t,T) = \alpha(t, T)dt + \sigma(t,T) dw_t \,,$$ with $\alpha(t, T) = \sigma(t,T)\int_t^T \sigma(t,s)ds$....