hello and IR as discount rate question

[berlinhammer]

Hello All, I'm new here, this looks like a great forum. I'm studying for a fixed income exam in june.

Apologies for the staggeringly basic level of this question but I could go with getting this concept firmly in my mind. I basically want to know what the 'prevailing interest rate' is and how it is determined in the sense of the required return used in DCF techniques.

Of course, I'm aware of the base rate, but my main point of confusion is whether the prevailing IR is standard across maturities, or whether (assuming a normal yield curve), there are different prevailing IRs for different maturity ranges. For instance is the prevailing IR used in pricing a 30-yr Gilt the same as the prevailing IR for a shorter dated Gilt, say a 2-yr Gilt?

So when pricing bonds of differing maturities, assuming the discount rate to be the 'prevailing interest rate', is there a standard IR used for evaluating all bonds (for example 3-mth cash)? Or are there different prevailing IRs for different intervals across the term structure? For example a prevailing IR at 2-yr, 5-yr, 10-yr....

Again sorry for such a fundamental question but i could really go with someone clearing this up for me so I can stop confusing myself!!

Many thanks

bh

 

[berlinhammer]

sorry this probably should have gone in the general/starting out section

perhaps a mod could move it?

thanks

bh