Webcast & Podcast

In order to determine the price of a fixed rate debt security, the forward rate must be used. The zero coupon yield can also be used to discount the cash flows of a bond. If the cash flows are discounted from a classic curve of the interest rate structure, this leads to the bond in question being overvalued. This means that the level of the interest rates of the interest rate structure curve under consideration is lower than the interest rates of the zero-coupon yields or forward rates. If the interest rate structure is inverse, the bond is underpriced. The reason for this is that the interest rates from the curve of the interest rate structure are higher than those of the zero-coupon bonds or forward rates. A difference to the inverse and classic curve of the interest rate structure is the horizontally running structure curve, which enables an ideal assessment of the debt securities. This is due to the fact that the interest rate of the yield structure curve coincides with those of the forward rates and zero coupon yields.

After the mean value of the commitment period of the capital has been calculated, the present values must be calculated. The mean value of the commitment period results from the consideration of all possible times of a payment of the debt securities. From this, the repayments and interest at all points in time can be defined. The present value is calculated by weighting the respective payments in relation to the analysed points in time and then adding them up. The resulting sum is then divided by the value of all present values. The result obtained depends on the following variables:

- the remaining term of the debt instrument

- the cash flows

- the defined timing of the cash flows

- the yield to maturity

The ratio of the ratios of the forward rates and the spot rate curve

Thus, as a principle of interpretation, as the cash flow increases in Exness fx Asia terminal, the average commitment period of the principal decreases. With a small cash flow, on the other hand, the average commitment period of the capital is higher. When considering the remaining term of the debt instrument, a longer remaining term leads to an increase in the average capital commitment period. In the case of a short remaining term, the capital commitment period also behaves in parallel and decreases. It also applies that the average commitment period of the capital cannot exceed the remaining term when considering classical instruments. In the case of an early or frequently occurring cash flow, the capital commitment period is lower than in the case of an infrequent and late cash flow.

If the yield to maturity is high, the average commitment period of the capital is low. The low yield to maturity is therefore associated with a longer capital commitment period. These considerations can be used to conclude the selected investment on the financial market with a lower risk of interest rate changes. With the help of the calculation of the average capital commitment period, it can thus be shown when a balance can be achieved between the value achieved at the end of the investment and the market value. The risk of a change in the interest rate is thus eliminated when the average capital commitment period corresponds to the duration of the investment.

The Conclusion on Spot Rate Curve

With the help of the definition of the average capital commitment period, a statement can also be made about the risk of a change in the market value. The value of an investment reached at the end of the term is contrary to the market value, which means that both values are dependent on each other. A low risk of a change in the market value thus results in a high risk of a change in the value achieved at the end of the term.