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Increasing Spot Rates Of Interest: Structure Of The Price Of A Default Free Discount Bond

Author

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  • SALVADOR CRUZ RAMBAUD

    (Departamento de Dirección y Gestión de Empresas, University of Almería, Spain)

  • MARÍA DEL CARMEN VALLS MARTÍNEZ

    (Departamento de Dirección y Gestión de Empresas, University of Almería, Spain)

Abstract

This paper aims to establish a set of necessary and sufficient conditions that the expression of a default free bond must verify in a situation in which spot rates of interest increase. In this case, if the agent divides the period of his investment, that is, if he disinvests and, immediately, re-invests his capital in different issues of bonds, can obtain an advantage in the final amount. In order to do this, necessary conditions include an approximation of the forward interest rate, that is to say the logarithmic density, its limits to +∞ and -∞ and the second generalized derivative of the bond price. Sufficient conditions involve an auxiliary function using these limits and, finally, necessary and sufficient conditions are related with the logarithm of the bond price.

Suggested Citation

  • Salvador Cruz Rambaud & María Del Carmen Valls Martínez, 2002. "Increasing Spot Rates Of Interest: Structure Of The Price Of A Default Free Discount Bond," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(03), pages 321-332.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:03:n:s0219024902001456
    DOI: 10.1142/S0219024902001456
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