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JP Morgan Discount Factor Modelling

Settlement date
14-Feb-99

Coupon Maturity Bid Ask Mid JPM Fair Price


6.50% 15-Feb-00 100.563 100.583 100.57% #VALUE!
8.00% 15-Feb-01 102.786 102.854 102.82% #VALUE!
10.00% 15-Mar-02 108.406 108.526 108.47% #VALUE!
5.50% 15-Apr-03 96.673 96.827 96.75% #VALUE!
8.00% 15-Apr-04 105.034 105.234 105.13% #VALUE!
8.00% 15-Nov-06 106.518 106.809 106.66% #VALUE!
7.00% 15-Jul-09 100.549 100.903 100.73% #VALUE!
6.00% 15-Nov-11 91.666 92.049 91.86% #VALUE!

Model Parameters

deg 2 Degree JP Morgan polynomial


restr 0.05 0: no restrictions, 1:DF(t=0) =1, other values: short rate
frequency 2 Number of coupon payments per year

Discount Function Zero Rates


1 1200.0%

0.8 1000.0%

0.6 800.0%

0.4 600.0%

0.2 400.0%

0 200.0%

-0.2 0.0%
- 2 4 6 8 10 12 - 2 4 6
TEST AREA
Dimension: 0
Coefficients Regression Problem
(cheap) / rich JPM Coefficients Coefficient Matrix C
#VALUE! a0 #VALUE! ### ### ### ###
#VALUE! a1 #VALUE! ### ### ### ###
#VALUE! a2 #VALUE! ### ### ### ###
#VALUE! a3 #VALUE! ### ### ### ###
#VALUE! a4 #VALUE! ### ### ### ###
#VALUE! a5 #VALUE! ### ### ### ###
#VALUE! a6 #VALUE! ### ### ### ###
#VALUE! a7 #VALUE! ### ### ### ###

CT x C
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Zero Rates Err:502 Err:502 Err:502 Err:502
.0% Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
.0%
(CT x C)-1
.0% Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
.0% Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
.0% Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
.0% Err:502 Err:502 Err:502 Err:502

.0%
- 2 4 6 8 10 12

Source Data Charts


0 #VALUE! ###
0.5 #VALUE! ###
1 #VALUE! ###
1.5 #VALUE! ###
2 #VALUE! ###
2.5 #VALUE! ###
3 #VALUE! ###
3.5 #VALUE! ###
4 #VALUE! ###
4.5 #VALUE! ###
5 #VALUE! ###
6 #VALUE! ###
7 #VALUE! ###
8 #VALUE! ###
9 #VALUE! ###
10 #VALUE! ###
ion Problem Price incl accr. interest Direct Solution with Linest Function
Price Matrix P
### ### ### #VALUE! Err:502
### ### ### #VALUE! Err:502
### ### ### #VALUE! Err:502
### ### ### #VALUE! Err:502
### ### ### #VALUE! Err:502
### ### ### #VALUE! Err:502
### ### ### #VALUE! Err:502
### ### ### #VALUE! Err:502

CT x P
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502

A=(CT x C)-1 x CT x P
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Err:502 Err:502 Err:502 Err:502
Testing CC Function
fr
#VALUE! 1.00278 0.00278 1.00000
#VALUE! 2.00278 0.00278 2.00000
#VALUE! 3.08611 0.08611
#VALUE! 4.16944 0.16944
#VALUE! 5.16944 0.16944
#VALUE! 7.75278 0.25278
#VALUE! 10.41944 0.41944
#VALUE! 12.75278 0.25278
1 2 3
1.0382 0.0082 1.0465
4.1716 0.0903 0.04022 0.01011 4.3122
Term Structure of Interest
Simple yield to maturity based bond valuation models neglect the fact that cash flow patterns may be different between bonds. Compare
the yield to maturity of the two bonds below. Which bond would you select?

Bond A Bond B
Price 114.64 73.64
Coupon 10% 3%
Time to maturity 8 yrs. 8 yrs.
Yield to maturity? 7.50% 7.50%

The table below shows you the zero coupon rates for this market. Based on these data, which bond would you select?

Time (years)
0 1 2 3 4 5 6 7 8
Zero rates 3.746% 5.071% 6.336% 6.862% 7.156% 7.424% 7.493% 7.563% 7.612%
Cash flows
Bond A 10 10 10 10 10 10 10 110
Discounted 114.78 9.5174 8.8438 8.1946 7.5846 6.9903 6.4821 6.0029 61.1656
Price 114.64
Difference -0.14 negative means bond is "cheap"

Bond B 3 3 3 3 3 3 3 103
Discounted 73.36 2.8552 2.6531 2.4584 2.2754 2.0971 1.9446 1.8009 57.2732
73.64
Difference 0.28 positive means bond is "rich"

If a bond is trading above the present value determined by discounting coupon and principal at the zero coupon rates, we
say the bond is "rich", otherwise it is "cheap".

Kurt Hess, WMS 25891267.xls Initial Example 12/02/2009 page 11