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Quantitative Finance by Matt Davison

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Chapter 12

Yield Curves and Bond Risk Measures

12.1 CHAPTER SUMMARY

In this chapter, we discuss a concept called the yield curve, which is an excellent way of organizing information about bond prices, and which in addition bears many economic insights. In Section 12.3, we discuss how to compute these yield curves from bond prices in a process known as bootstrapping. We then discuss various sensitivity measures of the bond price to the yields in Section 12.4. These sensitivities go by the names of duration and convexity.

12.2 Introduction

In Chapters 5, 7, and 11 of this book, we looked at the basics of pricing bonds given an interest rate that was constant for debt of all maturities. For nondefaultable debt, this is, in principle at least, easy ...

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