The Study On Term Structure Of Interest Rate And Treasury Bond Pricing

Interest as a most important variable in economics, its undulation will have animportant influence to selection and disposition of all benefit main bodies in economics.Thus to individual expense and the deposit, the enterprise investment and financing,government's finance and the monetary policy has the important influence. At the sametime the interest rate policy also is the important tool to the government and the currencyauthority carries on the macroeconomic regulations and controls. One of currencyconduction mechanisms is the Central Bank enables the currency supplies quantitychanges through the change discount rate and the open market operation to affect theentire market the capital price. The function of interest rate which had decided thedefault-free interest rate as the datum interest rate in the market specially the treasurybills interest rate becomes the key point of the research. Many economists' researchesestablish on the hypothesis that the risk-free interest rate is a constant in the asset pricingmodel, namely no matter what time this interest rate is constant this wrong hypothesis.But actually, the nature of the risk-free interest rate change with the term change is calledthe term structure of interest. The curve of yield - time two-dimensional describes theyield curve.The paper conducts research on the term structure of interest rate and treasury bondpricing. The paper firstly analyzes Chinese treasury security market and its structure, andpoints out that there are some matters in China treasury security's pricing system andtechnology which go against healthy development of treasury security markets, and alsosome opportunities we should grasp. The paper also proposes some systematic andfeasible policy advices on reformation of treasury security market. It points out that thebond market will be a important fact in the finance market development, because the bond isextremely sensitive finance production to the interest rate, the term structure of interest rate playthe decisive role to the bond pricing. The paper then introduces the traditional theories andmodern theories on term structure of interest rate. Four of the traditional theories on termstructure of interest rate: expectation theory, liquidity preference theory, preferred habitattheory and preferred habitat theory, and then analyzes the advantages and limitations ofeach theory. Furthermore, the paper describes two moderm models of the term structure of interest rate since 1970 after the B-S option pricing model was applied in term structureof interest: the Equilibrium Model and the Arbitrage-Free Model. At last, the paper hasconducted an empirical study. The paper estimates a static approximation of termstructure of interest rate in China using treasury bonds in Shanghai SecuritiesExchange. Based on the term structure of interest rate, the paper makes a theoreticalpricing to the choosed bonds, so as to make some contributions to the research of treasurybond pricing and term structure of interest rate model in China. With China entering theWTO and speeding up marketable interest reforming, China's financial institutions andenterprises will be confronted with more and more interest rate risks. And the termstructure of interest rate play an important role in the interest rate risk management. The termstructure of interest rate is the foundation of asset pricing, financial products designing,hedging and risk management, arbitrage and investment. So, the study of term structureon interest in a branch of finance theory, and its estimation is a very foundationalquestion in finance engineering.