Investments, tenth edition

 Example  15.1 

Valuing Coupon Bonds 

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P A R T   I V

 Fixed-Income 

Securities

Treasuries. In contrast, the    on-the-run  yield  curve    refers to the plot of yield as a function 

of maturity for recently issued coupon bonds selling at or near par value. As we’ve just seen, 

there may be significant differences in these two curves. The yield curves published in the 

financial press, for example, in  Figure  15.1 , are typically on-the-run curves. On-the-run 

Treasuries have the greatest liquidity, so traders have keen interest in their yield curve.     

    15.2 

The Yield Curve and Future Interest Rates 

  We’ve told you what the yield curve is, but we haven’t yet had much to say about where 

it comes from. For example, why is the curve sometimes upward-sloping and other times 

downward-sloping? How do expectations for the evolution of interest rates affect the shape 

of today’s yield curve? 

 These questions do not have simple answers, so we will begin with an admittedly ideal-

ized framework, and then extend the discussion to more realistic settings. To start, consider 

a world with no uncertainty, specifically, one in which all investors already know the path 

of future interest rates.