金融工程案例分析The DMOs Yield Curve Model.pdfVIP

United Kingdom Cheapside House 138 Cheapside Debt London EC2V 6BB Management Office UNITED KINGDOM DEBT MANAGEMENT OFFICE The DMOs Yield Curve Model July 2000 The DMO’s yield curve model Introduction The most commonly used measure of a bond’s return is the gross redemption yield – the single rate that, if used to discount each of the bond’s cash flows individually, equates the bond’s total present value to its price in the market. Implicit in this definition is the assumption that it will be possible to re-invest all of the bond’s future coupon payments at the current redemption yield - clearly an unrealistic assumption. Using redemption yields to discount bond cash flows has the disadvantage that there is not a unique discount rate for a given maturity. Given this, it is more desirable to look at zero-coupon yields. The zero-coupon rate for a given maturity is the rate at which an individual cash flow on this future date is discounted to determine its value today and can be thought of as the yield to maturity of a zero-coupon bond. The zero- coupon yield curve is simply the continuous curve of zero-coupon rates. When calculating the net present value of a bond’s cash flows using the zero- coupon curve, a different zero-coupon rate is used for each cash flow. Across the market, all cash flows on a given date - irrespective of which bond they originate from - are discounted using the same zero-coupon rate. This article examines the method used by the DMO to estimate the zero-coupon gilt yield curve. Types of yield curve Once estimated, the zero-coupon yield curve can be transformed uniquely into three other curves: the par yield curve, the discount function and the implied forward rate