![]() Duration and convexity are the basic tools for managing the interest rate risk inherent in a bond portfolio. In an interest rate swap, counterparties exchange a stream of fixed-rate payments for a stream of floating-rate payments typically indexed to LIBOR. These rates are called forward or futures rates, depending on the type of the agreement. Loans can be borrowed over future time intervals at rates that are agreed upon today. An important reference rate for many interest rate contracts is the LIBOR (London Interbank Offered Rate). The term structure is the function that maps the maturity to the corresponding interest rate or bond price. Interest rates and bond prices depend on their maturity. The latter are also called discount bonds. ![]() ![]() There exist coupon paying bonds and zero-coupon bonds. A bond is the securitized form of a loan. We learn various notions of interest rates and some related contracts.
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