10. Debt Markets: Term Structure

Financial Markets (ECON 252)

The markets for debt, both public and private far exceed the entire stock market in value and importance. The U.S. Treasury issues debt of various maturities through auctions, which are open only to authorized buyers. Corporations issue debt with investment banks as intermediaries. The interest rates are not set by the Treasury, the corporations or the investment bankers, but are determined by the market, reflecting economic forces about which there are a number of theories. The real and nominal rates and the coupons of a bond determine its price in the market. The term structure, which is the plot of yield-to-maturity against time-to-maturity indicates the value of time for points in the future. Forward rates are the future spot rates that can be calculated using today's bond prices. Finally, indexed bonds, which are indexed to inflation, offer the safest asset of all and their price reveals a fundamental economic indicator, the real interest rate.

00:00 - Chapter 1. Introduction
04:25 - Chapter 2. The Discount and Investment Rates
19:12 - Chapter 3. The Bid-Ask Spread and Murdoch's Wall Street Journal
29:17 - Chapter 4. Defining Bonds and the Pricing Formula
39:38 - Chapter 5. Derivation of the Term Structure of Interest Rates
52:34 - Chapter 6. Lord John Hicks's Forward Rates: Derivation and Calculations
01:06:09 - Chapter 7. Inflation and Interest Rates

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Spring 2008.