Lecture 5 Understanding Interest Rates

quarter) interest rate and the spread between the short rate and a long (five­year) rate. II. Replicating Zero Coupon Bonds We now select a number N of long bonds (where N is also the number of factors), zero­ coupon bonds with maturity greater than one period. Our goal is to construct a portfolio con­ taining the long bonds and the short ... ................
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