Glossary

The yield curve can be used to calculate the expected return on bonds of different maturities but with similar credit risk. A commonly used yield curve in the wholesale market is the so called "swap curve" which represents the interest rates for different maturity interest rate swaps (see later course on basic derivatives).


Another useful feature of the yield curve is that it can be used to derive so called discount factors. These are percentage figures that represent the equivalent value of a notional unit of £1 paid at any given future date.

So for example if the rate of interest available on a one year maturity deposit (or the yield for a one year bond) is 5%, then the value today of £1 in one year's time is roughly 95p. Or in other words 95p invested for one year at 5% is approximately equal to £1.