The Term Structure Tools module provides functions for calculating ordinary spot interest rates, forward interest rates according to different methods, estimation of zero-coupon term structures from prices and cash flows and for fitting discrete interest rates to a continuous term structure function. In addition there are different conversion functions that can handle nominal, effective, periodic and annual rates.

Context

 To understand instruments like forward rate agreements, money market forwards and foreign exchange forwards (see the Forwards module), it is necessary to know what a forward rate is. The function ToForwardRate is defined and calculated entirely from the knowledge of spot interest rates. Instruments which have a variable coupon, like floating rate bonds/notes (see the Floaters module), can also be priced by using forward rates.

When analyzing portfolios incorporating different interest rate sensitive instruments, it is useful to use zero-coupon interest rates as a common yardstick for pricing the cash flows. Using the individual yields to maturity on each instrument will not provide a correct way of comparing different interest rate sensitive products unless the cash flow patterns of each instrument are very similar. The function EstimateTermStructure can calculate zero-coupon interest rates. These rates can be used to price cash flows, for example using functions from the Pricing Tools module (refer to the Pricing Tools module).

Contents

4.1 Introduction

Summary -- Context -- This Opens the Package

4.2 Rate Conversion Functions/Components

AnnualToPeriodicRate -- PeriodicToAnnualRate
EffectiveToNominalRate -- NominalToEffectiveRate

4.3 Rate Generating Functions/Components

ToSpotRate -- ToSpotRates -- ToForwardRate -- ToForwardRateX
ToForwardRates -- ToForwardRatesX

4.4 Term Structure Functions/Components

+InterpolateInterestRates -- +FitInterestRates
EstimateTermStructure