Bond Glossary Videos

The speaker discusses the valuation of an interest rate swap.  At the time the counterparties agree to swap, the value of the swap is nearly 0; each counterparty expects the benefit to change over time as rates change.  Each leg of the swap can be treated as a bond, one fixed and one floating.  Therefore, the value of the interest rate swap is simply the difference in value between the two bonds. 

The speaker talks about how high levels of leverage contributed to the credit crisis.  Once the housing market moved lower, there was a move to deleverage by banks and hedge funds to reduce the debt on their balance sheets.

The speaker discusses the effects of the term to maturity on the bonds return.  The question really is, who does better on a bond investment, a short term investor or a long term investor.  He suggests an investment in a bond is equivalent to a series of forward loans at rates given by the forward rate curve. 

Using a spreadsheet, he explains how to delineate whether a short term or long term investment is more profitable using forward rate assumptions.  In essesnce, a long term bond investor is locking in a series of forward rates as implied by the forward rate curve while a short term investor would continue roll their funds over into new short term bonds as the old ones mature.  The uncertainty of forward rates for a short term investor may yield a higher or lower total return depending on the rate environment in the future.