Question

1. What is the term structure of interest rates? Which major types of term structure do you know and what do they mean?
2. In which units is bond’s duration measured? How can you interpret bond’s duration?
3. Interpret the following option greeks’ values for a call option: delta, gamma, theta, vega, rho

Answer 1

1. Term structure of interest rate reflects the relationship between bond yields or interest rate along with the maturity of the securities

Term structure of interest rate is a reflection of expectation of change in interest rate during a monetary policy of the central bank.these are considered very important by the economists because the shape of the Yield curve would decide upon the future expectations of interest rates in an economy which will decide the economic cycle in a country.

Type of term structure would be-

1.Normal yield structure in which Yield of long term bonds will be higher than short term bonds.

2. Inverted yield structure in which short term bond yields would be higher than long term bond yields.

3. Flat term structurein which the short term as well as long term bond yield should be flattened.