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ECON 251: Financial Theory

Lecture 09 - Yield Curve Arbitrage. Where can you find the market rates of interest (or equivalently the zero coupon bond prices) for every maturity? This lecture shows how to infer them from the prices of Treasury bonds of every maturity, first using the method of replication, and again using the principle of duality. Treasury bond prices, or at least Treasury bond yields, are published every day in major newspapers. From the zero coupon bond prices one can immediately infer the forward interest rates. Under certain conditions these forward rates can tell us a lot about how traders think the prices of Treasury bonds will evolve in the future. (from oyc.yale.edu)

Lecture 09 - Yield Curve Arbitrage

Time Lecture Chapters
[00:00:00] 1. Defining Yield
[00:09:07] 2. Assessing Market Interest Rate from Treasury Bonds
[00:35:46] 3. Zero Coupon Bonds and the Principle of Duality
[00:50:31] 4. Forward Interest Rate
[01:10:05] 5. Calculating Prices in the Future and Conclusion

References
Lecture 9 - Yield Curve Arbitrage
Instructor: Professor John Geanakoplos. Transcript [html]. Audio [mp3]. Download Video [mov].

Go to the Course Home or watch other lectures:

Lecture 01 - Why Finance?
Lecture 02 - Utilities, Endowments, and Equilibrium
Lecture 03 - Computing Equilibrium
Lecture 04 - Efficiency, Assets, and Time
Lecture 05 - Present Value Prices and the Real Rate of Interest
Lecture 06 - Irving Fisher's Impatience Theory of Interest
Lecture 07 - Shakespeare's Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance
Lecture 08 - How a Long-Lived Institution Figures an Annual Budget; Yield
Lecture 09 - Yield Curve Arbitrage
Lecture 10 - Dynamic Present Value
Lecture 11 - Social Security
Lecture 12 - Overlapping Generations Models of the Economy
Lecture 13 - Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire?
Lecture 14 - Quantifying Uncertainty and Risk
Lecture 15 - Uncertainty and the Rational Expectations Hypothesis
Lecture 16 - Backward Induction and Optimal Stopping Times
Lecture 17 - Callable Bonds and the Mortgage Prepayment Option
Lecture 18 - Modeling Mortgage Prepayments and Valuing Mortgages
Lecture 19 - History of the Mortgage Market: A Personal Narrative
Lecture 20 - Dynamic Hedging
Lecture 21 - Dynamic Hedging and Average Life
Lecture 22 - Risk Aversion and the Capital Asset Pricing Theorem
Lecture 23 - The Mutual Fund Theorem and Covariance Pricing Theorems
Lecture 24 - Risk, Return, and Social Security
Lecture 25 - The Leverage Cycle and the Subprime Mortgage Crisis
Lecture 26 - The Leverage Cycle and Crashes