Interest rates, coupon bonds, and their derivatives are the main instruments of the debt markets, which constitute well over 60% of the entire capital markets. A brief discussion locates the debt markets in the general framework of finance and points to the growing importance of the debt markets in the global economy. Interest rates are a measure of the returns on cash deposits, whereas coupon bonds are a measure of the present value of future cash flows. From this intuitive and apparently simple idea flow all the various definitions of interest rates and coupon bonds. The fundamental concept of forward interest rates that describe the bond market is introduced. The interest rate markets are driven by Libor and Euribor; these two instruments are defined and a few of their important features are discussed.

Introduction

Finance is the discipline that studies the borrowing, lending, and investing of money capital. The main form of money capital is paper issued by various governments and private organizations, which includes corporations and individuals. The three pillars of finance are equity, debt, and foreign exchange and are the basis of all financial instruments. Financial markets, collectively known as the capital markets, trade in these instruments.

Capital in economics represents the collection of productive assets required for carrying out economic activities. Financial ‘paper’ is not merely ordinary paper, but, rather, the preferred form of money capital that is used for representing value: a value based not on how it has been generated but, rather, on its present day and future value in the capital markets – and in economic activity in general.