Government bonds long-term

Bond A long-term debt-type of security generally issued by corporations or governments to generate cash. The coupon rate is the interest rate paid to the bondholder. The maturity date is when the face value of the bond will be paid to the bondholder. 

This model incorporates mean reversion, which is not an imrealistic feature. Mean reversion is the process that describes that when the short-rate r is high, it will tend to be pulled back towards the long-term average level when the rate is low, it will have an upward drift towards the average level. In Vasicek s model, the short-rate is pulled to a mean level 6 at a rate of a. The mean reversion is governed by the stochastic term odW which is normally distributed. Using Equation (3.24), Vasicek shows that the price at time t of a zero-coupon bond of maturity T is given by ... 

The different types of bonds in the European market reflect the different types of issuers and their respective requirements. Some bonds are safer investments than others. The advantage of bonds to an investor is that they represent a fixed source of current income, with an assurance of repayment of the loan on maturity. Bonds issued by developed country governments are deemed to be guaranteed investments in that the final repayment is virtually certain. For a corporate bond, in the event of default of the issuing entity, bondholders rank above shareholders for compensation payments. There is lower risk associated with bonds compared to shares as an investment, and therefore almost invariably a lower return in the long term. 

Bund refers to long-term bonds issued by the Federal Government of Germany. This is now the Marche a Terme Internationale de France (MATIF) or Furonext-Paris. 

A constant maturity swap, or CMS, is a basis swap in which one leg is reset periodically not to LIBOR or some other money market rate but to a long-term rate, such as the current 5-year swap rate or 5-year government bond rate. For example, the counterparties to a CMS might exchange 6-month LIBOR for the 10-year Treasury rate in eflFect on the reset date. In the U.S. market, a swap one of whose legs is reset to a government bond is referred to as a constant maturity Treasury, or CMT, swap. The other leg is usually tied to LIBOR, but may be fixed or use a different long-term rate as its reference. 

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