Zero-coupon rates sensitivities

EXHIBIT 24.7 Sensitivity of Zero-Coupon Rate Changes with Respect to Factor 1... 

For the period as a whole, the first factor (see Exhibit 24.7) may actually be regarded as a level factor since it affects similarly all zero-coupon rates, except for the portion (1 month-1 year), which moves differently. Displaying the sensitivity of interest rates with respect to the second factor, Exhibit 24.8 shows a decreasing shape, first positive for short-term maturities then negative beyond. Hence, the second factor may be regarded as a rotation factor around a medium maturity between two and four years depending on the country we consider. The third factor (see Exhibit 24.9) has different effects on intermediate maturities as opposed to extreme maturities (short and long). Hence, it may be interpreted as a curvature factor. 

Under risk-neutrality assumption, the most appropriate discount rate is the risk-free rate. The model is more sensitive to the change of recovery rates, while less sensitive to the change in interest rates. If we consider a zero-coupon bond rated R with maturity at time T, the price is given by Equation (8.28) ... 

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