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Fixed Income, step 4 of 6

FI5 Yield Curve

Session timeline

Briefing
Trading40 min
Debrief

The case

Government bonds and zero-coupon benchmarks of several maturities trade together. Together they form the yield curve.

Objective

Find where the curve is wrong and trade it. Assessed on profit and loss.

What it shows

  • The yield curve built from the prices of a set of bonds.
  • Zero-coupon prices as the discount factors the coupon bonds should be priced from.
  • Trades along the curve: steepeners, flatteners and butterflies.

Watch out for

  • A coupon bond priced well against one zero and badly against the curve.
  • Seven securities and not enough time to look at all of them.
  • A trade along the curve that is right on the level and wrong on the shape.

Who takes part

  • Trader — every student. Trades GOVT2, GOVT5 and GOVT10, government bonds of two, five and ten years, and ZERO1, ZERO2, ZERO5 and ZERO10, benchmark zeros.

Class size

Ten to forty students in one role. Seven securities are priced by the class, so twenty or more keeps each active.

Concepts

  • Yield curve

Roles

  • Trader

    You trade government bonds at two, five and ten years and benchmark zeros at one, two, five and ten years.

    • Assessed on profit and loss.

Instruments

TickerNameMarketStudents can
GOVT2Two-year government bondContinuous tradingTrade it
GOVT5Five-year government bondContinuous tradingTrade it
GOVT10Ten-year government bondContinuous tradingTrade it
ZERO1One-year benchmarkContinuous tradingSee it, not trade it
ZERO2Two-year benchmarkContinuous tradingSee it, not trade it
ZERO5Five-year benchmarkContinuous tradingSee it, not trade it
ZERO10Ten-year benchmarkContinuous tradingSee it, not trade it

In the tracks