Dear John,
I have a question about what the yield curve in bpp chapter 7 Financing and Credit Risk means. The horizontal axis is the years to maturity, but does the vertical axis represent the spot rates for every year or the average rates in terms of different years to maturity i.e. yield to maturity?
For example, in a yield curve, if 3 years to maturity matches 5.5? yield, does it mean required yield in year 3 is 5.5?(like what Activity 1 calculates) or the average yield in 3 years in 5.5?(like what Activity 2 calculates based on)?
Thank you so much!
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A question on yield curve
Sorry, something wrong with the above percentage symbol. It should have been 5.5 percent. Thank u!
5y ago#2Sorry, but I do not have the BPP Study Text (only the Revision Kit).
Have you read the technical article on this on the ACCA website?
Oh, I just read it.
https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/bond-valuation-yields.html
It explained the spot yield and yield to maturity. And it said:
Bond price=coupon*(1+r1)^-1+coupon*(1+r2)^-2+...+coupon*(1+rn)^-n+redemption value*(1+rn)^-n
Where r1, r2 etc are spot interest rates based on the yield curve and n is the number of time periods.
So the vertical axis of the yield curve represents spot yield rate not the yield to maturity?
5y ago#4Without seeing the graph you are referring to it would seem that what you have written is correct.
However in Paper AFM you are never given this graph and nor can you be asked to produce it
:-)
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