Without much technical expertise, a yield curve model is presented that is very dynamic and can be easily programmed in Excel for classroom presentation or for assignments. By using the output of the model to have students find embedded rates within the yield curve, a discussion of how bond traders speculate on interest rates emerges very easily. Further, the model output can also be used for numerous exercises including the pricing of strips or for evaluating the positions of an entire bond portfolio. Within the exercises, the dynamic nature of the model can be exploited to provide sensitivity analysis.
Copyright © 2007 Financial Education Association. This article first appeared in the
Journal of Financial Education 33 (Summer 2007): 64-72.
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Arnold, Tom. "A Simple Model of Interest Rate Term Structure." Journal of Financial Education 33 (Summer 2007): 64-72.