Rates Trading Glossary: OIS, DV01, Swap Spreads and Yield Curves

Rates trading terminology describes how professional investors quote, compare, hedge and manage interest-rate exposures. Core terms include overnight indexed swaps (OIS), forward rate agreements (FRAs), swap spreads, basis points, DV01 and key-rate duration. These concepts describe different aspects of valuation and risk; they should not be treated as interchangeable yield forecasts.

This reference goes beyond a basic bond glossary to focus on rates desks and portfolio hedging. It explains how curve points, swap quotations and price sensitivity interact, and why the same yield change does not affect every maturity equally. Calculations use imaginary numbers to demonstrate methodology rather than current market quotes.

Key terms explained

Basis point (bp)

A basis point is one hundredth of one percentage point: 1 bp = 0.01 percentage point = 0.0001 in decimal yield terms. A move from 4.00% to 4.25% is 25 bp, not 0.25 bp. Market reports often quote policy changes, credit spreads and yield-curve slopes in basis points to avoid ambiguity. The corresponding change in a bond’s price depends on duration and convexity, not merely the number of basis points.

Yield curve

A yield curve displays interest rates or yields across maturities for a particular class of instruments, such as government bonds, overnight indexed swaps or credit-sensitive deposits. It is not one universal curve: different collateral, credit and liquidity conditions produce different term structures. Analysts compare curve levels, slopes and curvature and must specify whether observations are par yields, zero rates or forward rates before attempting valuation.

Zero-coupon rate (spot rate)

A zero-coupon or spot rate discounts a single cash flow at a given maturity. Pricing a fixed-coupon bond ordinarily involves discounting each future coupon and principal payment using an appropriate set of rates rather than one yield applied blindly to all maturities. A zero curve can be constructed from traded instruments by bootstrapping under modelling assumptions. The rate’s compounding, day count and credit basis must be consistent.

Forward rate

A forward interest rate is the rate implied today for a future interval by a consistent term structure of discount factors. For example, a one-year rate starting one year from now is derived from the relative pricing of one-year and two-year cash flows. A forward rate is a market-implied price including premia and conventions, not a promise that the realised rate will equal the forward when the date arrives.

Overnight indexed swap (OIS)

An OIS exchanges a fixed rate against a floating rate derived from an overnight benchmark compounded or averaged over a specified period according to contract conventions. OIS curves are widely used in monetary-policy analysis and discounting collateralised derivatives when aligned with the collateral agreement. An OIS quote is not identical to an unsecured bank term-funding quote: different instruments carry different risks and cash-flow conventions.

Forward rate agreement (FRA)

A forward rate agreement fixes an interest rate for a specified future borrowing or lending period, commonly settling a cash difference rather than transferring the full loan principal. Its contract tenor, reference index and day-count conventions determine the precise payoff. FRA pricing can reflect expectations and credit or funding premia. Compare it with OIS or futures only after adjusting for market conventions and contract structure.

Interest rate swap (IRS)

An interest rate swap exchanges specified fixed and floating interest cash flows on a notional amount. The notional usually serves as a calculation base rather than an exchanged principal in a standard single-currency fixed-for-floating swap. The swap’s fair fixed rate balances the present values of the legs under the chosen curves. Receiver and payer terminology refers to which fixed-rate leg a party receives or pays.

Swap spread

A swap spread is often defined as a fixed swap rate minus the yield on a government bond of a comparable maturity. It reflects multiple influences including collateral, funding, government-bond supply and demand, regulation and the comparability of the chosen maturities. A negative swap spread is possible and does not prove a risk-free arbitrage. Use consistently matched maturity and benchmark definitions.

DV01 / PVBP

Dollar value of one basis point (DV01), also called price value of a basis point (PVBP), measures approximately how much an instrument’s value changes for a 1 bp yield move. For a bond with market value £1,000,000 and modified duration 5, DV01 is approximately £1,000,000 × 5 × 0.0001 = £500 per bp. This is a local linear approximation; convexity and changing cash flows matter for larger shocks.

Modified duration

Modified duration approximates the percentage price sensitivity of a fixed-income instrument to a small parallel change in yield, subject to its cash-flow assumptions. A duration of five implies roughly a 0.05% price change in the opposite direction for a 1 bp yield change. Option features, floating coupons or large moves can weaken the approximation. It is not the same as the number of calendar years until a bond matures.

Key-rate duration (KRD)

Key-rate duration estimates a portfolio’s price sensitivity to changes at selected points on an interest-rate curve, allowing the rest of the curve to be held or interpolated under an explicit framework. A portfolio can have modest overall DV01 yet substantial exposure to a relative move between two and ten years. Key-rate buckets help identify curve-shape risk that a single scalar duration conceals.

Curve steepener and flattener

A steepener position seeks to benefit when the spread between longer and shorter rates increases under the specified slope convention; a flattener seeks the opposite. Trades may use cash bonds, futures or swaps and can be designed to reduce parallel-rate exposure, but mismatched DV01s, funding and basis can still cause substantial losses. Bull and bear steepeners describe whether yield levels generally fall or rise while the curve steepens.

Carry and roll-down

Carry describes the income or financing effect of holding a rate position, while roll-down describes how its valuation may change as time passes and maturity shortens if the yield curve is unchanged under a specified assumption. They are scenario components, not guaranteed return. Funding rates, market-value changes, convexity, transaction costs and curve shifts can overwhelm a positive-looking carry-and-roll estimate.

Convexity and non-linear price response

Convexity describes how duration changes as yield changes, creating curvature in the bond price-yield relationship. For many conventional non-callable fixed-rate bonds, positive convexity means gains from a given-sized yield decline exceed losses from an equal rise in yield under simple assumptions. Options and structured products may display different or changing convexity. DV01 is a first-order sensitivity, not a complete stress test.

Worked example

Imagine a hypothetical £2 million bond holding with modified duration 4.5. Its approximate DV01 is £2,000,000 × 4.5 × 0.0001 = £900 per bp. If yields rise uniformly by 12 bp, first-order estimated price change is −£900 × 12 = −£10,800. The estimate excludes convexity, spread moves, accrued interest changes and trading costs; it is not the same as a realised portfolio return.

Now compare two portfolios with the same £900 aggregate DV01. One has most of its risk in two-year government bonds and the other in ten-year bonds, with an offsetting short exposure elsewhere. A non-parallel curve shift can affect them differently despite identical headline DV01. This is why a rates desk examines key-rate exposures and stress scenarios before claiming a hedge is neutral.

Consider a 2s10s government yield slope where the two-year yield is 3.20% and the ten-year yield 3.70%. The slope is +50 bp. If the two-year yield moves to 3.50% and the ten-year yield to 3.80%, the slope narrows to +30 bp: a 20 bp flattening, even though both yields increased. A simple story about ‘rates rising’ misses the curve-shape effect.

How professionals use these terms

A professional risk report begins with an instrument inventory: cash bonds, futures, swaps, floating-rate notes, repo funding and options. Each exposure is mapped to an appropriate curve, currency and maturity. Analysts then calculate PV01 or DV01, key-rate sensitivities and scenario profit and loss, checking whether quantities are in base currency and whether instruments share the same risk-factor definition.

Macro researchers examine whether a central-bank decision changes the near-term policy path, longer-term inflation expectations or term premia. A parallel upward shift in OIS is not the same as a steepening of the government-bond curve. Portfolio managers also track swap-spread changes because government bonds and swaps can diverge even when the same headline yield tenor is used.

An execution decision considers bid-ask spreads, liquidity, collateral, clearing and financing. A DV01-neutral cash-bond versus swap trade can retain basis risk, and a forward-rate trade may be exposed to how the curve evolves. Professional terminology is useful only when paired with the contract details and actual positions.

Common interpretation errors

Do not confuse 25 bp with 25%, or a forward rate with a prediction. Do not treat modified duration and DV01 as units of the same thing: one is a scaled percentage sensitivity and the other a currency amount. Avoid interpreting every swap spread through one credit-risk story; balance-sheet, collateral and government-bond liquidity also matter.

A reported rate hedge must specify shock size, curve construction, sign convention and instrument assumptions. A single risk number can conceal non-parallel moves and optionality. Current hedge performance may differ from the scenario because market volatility, convexity and discounting assumptions change.

At-a-glance comparison

Frequently asked questions

Is DV01 the same as duration?

No. Duration is usually scaled price sensitivity; DV01 expresses approximate value change in currency for a 1 bp yield move.

Does a steepener profit whenever rates rise?

No. It depends on how the selected long-short yield spread changes and on the position’s detailed exposures.

Is OIS the central bank’s policy rate?

No. OIS is a traded contract rate referencing an overnight benchmark and may reflect expected future overnight settings and premia.

Can swap spreads be negative?

Yes. Funding, collateral, bond demand and other market frictions can produce negative spreads.

Are rates forwards reliable interest-rate forecasts?

They embed market pricing and premia and need not equal later realised rates.

Authoritative sources and further reading

• CFA Institute Research Foundation: Interest Rate Concepts and DV01
• CFA Institute: Managing Interest Rate Risk
• ISDA Derivatives Glossary

Continue learning: bond duration and convexity and interest rate swaps.

Educational information only. Illustrative calculations do not represent market prices, personal investment advice, or forecasts. All financial-market exposures involve risk.