Bond Market Interest Rate

By: EconomyWatch   Date: 23 November 2010

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Introduction

The bond market interest rate has a considerable effect on the price of a bond. The Bond market interest rate becomes a very important issue when one considers buying or selling of bonds from the secondary market. Till the time of maturity or expiry of the bond it pays the holder a fixed rate of interest which is coined as the coupon rate. The value of the bond is also highly influenced by the bond market interest rate. The concept of bond market interest risk assumes importance in learning about bond market interest rate. This is explained under the following head.

Bond Market Interest Rate Risk



Bond Market Interest Rate risk is something which makes the relative value of a bond go down due to the decrease in interest rate. This Bond Market Interest rate risk is calculated commonly by the bond's duration which is one of the oldest techniques used to cope with interest rate risk now. A complete set of techniques that are used to control this hike in Bond Market Interest Rate within a general enterprise framework of risk management is named the Asset Liability Management.

The analysis of interest rate mostly depend upon simulating movements in a single or more yield curves which is dependent upon the Heath-Jarrow-Morton framework to assure that the movement of the yield curves are both consistent with the present market yield curves and that arbitrage that is without risk is impossible.

One can find number of standard calculations which can measure the wallop of the changing rates of interest. Some of these techniques are :

  • Measurement of the net market value of the liabilities and assets.
  • Testing the stress by the duration where the yield curve shift is parallel.
  • Value at Risk calculation of the portfolio.
  • Multi period cash flow needs to be measured.


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