JP Morgan Discount Factor Modelling

Settlement date
14-Feb-99
Coupon

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

JPM Fair Price
#VALUE!
#VALUE!
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#VALUE!
#VALUE!

Model Parameters
deg
restr
frequency

2 Degree JP Morgan polynomial
0.05 0: no restrictions, 1:DF(t=0) =1, other values: short rate
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

(cheap) / rich
#VALUE!
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#VALUE!

a0
a1
a2
a3
a4
a5
a6
a7

Dimension:
0
Coefficients Regression Problem
Coefficient Matrix C
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JPM Coefficients
#VALUE!
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#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

CT x C
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502
Err:502

Zero Rates

.0%

Err:502
Err:502
Err:502
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Err:502
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Err:502

Err:502
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Err:502
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Err:502

Err:502
Err:502
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Err:502

(CT x C)-1
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
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Err:502

Err:502
Err:502
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Err:502
Err:502
Err:502
Err:502

.0%

.0%

.0%

.0%

.0%

.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!

###
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5
6
7
8
9
10

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

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ion Problem
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Price incl accr. interest
Price Matrix P
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

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

Err:502
Err:502
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Err:502
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Err:502
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Err:502

Err:502
Err:502
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Err:502
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Err:502

Err:502
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Err:502
A=(CT x C)-1 x CT x P
Err:502
Err:502
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Err:502

Direct Solution with Linest Function
Err:502
Err:502
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Err:502
Err:502
Err:502
Err:502

Testing CC Function
fr
#VALUE! 1.00278
#VALUE! 2.00278
#VALUE! 3.08611
#VALUE! 4.16944
#VALUE! 5.16944
#VALUE! 7.75278
#VALUE! 10.41944
#VALUE! 12.75278

0.00278
0.00278
0.08611
0.16944
0.16944
0.25278
0.41944
0.25278

1.00000
2.00000

1.0382
4.1716

1
0.0082
0.0903

2

3

0.04022

0.01011

1.0465
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?

Price
Coupon
Time to maturity
Yield to maturity?

Bond A
Bond B
114.64
73.64
10%
3%
8 yrs.
8 yrs.
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?

Zero rates
Cash flows
Bond A
Discounted
Price
Difference
Bond B
Discounted
Difference

Time (years)
0
1
3.746%
5.071%

2
6.336%

3
6.862%

4
7.156%

5
7.424%

6
7.493%

7
7.563%

8
7.612%

10
10
10
114.78
9.5174
8.8438
8.1946
114.64
-0.14 negative means bond is "cheap"

10
7.5846

10
6.9903

10
6.4821

10
6.0029

110
61.1656

3
3
3
73.36
2.8552
2.6531
2.4584
73.64
0.28 positive means bond is "rich"

3
2.2754

3
2.0971

3
1.9446

3
1.8009

103
57.2732

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

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