MATHEMATICAL SURVEY OF THE TERM STRUCTURE OF INTEREST RATE: EVIDENCE FROM NIGERIAN EUROBOND

Abstract

Term structure of interest rate describes the relationship between the yields on default-free securities which only differ in their term to maturity which mirrors the market future expectation for interest rates having consequences on fiscal policies with such factors such as interest rates and yield. The short-term yield  and the long-term yield react sharply to fresh market information which makes modeling and forecasting the term structure challenging. The paper aims to (i) determine how to predict the in-sample yield of time to maturity (ii) investigate how to use the parameters to determine the long-term and short-term yield. (iii) examine how the model fits into the observed data.(iv) determine the level, slope and curvature of Nigerian Eurobond. The statistical tools used for the analysis of data collected include ad-in Excel, SPSS 23 and the ordinary least square method. A linear regression was conducted and the results showed that the Nelson-Siegel model fits well into the observed data with R² adjusted of 90.8%.