1.

Construct a theoretical spot yield curve using a bootstrapping technique and data in
2016
Maturity & yields to maturity for 10 Hypothetical European Treasury securities
(Bonds all trade at par value except for 6 months & one year treasuries which are zero coupon securities)

Period
1
2
3
4
5
6
7
8
9
10

Years
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5

Coupon rate % Zeros: YTM (%)

Par Value
100.00
-0.30%
100.00
-0.20%
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00

0.00%
0.20%
0.50%
0.75%
1.00%
1.25%
1.50%
2.00%

YTM (Semi-annual)
Y
T
M
%

1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
0.5
-0.20%
-0.40%

1.5

2.5

3.5

4.5

Years

2. Using the resulting curve, price a 5 year, 3%pa coupon bond (semi- annual coupons)
discount rate.
European Treasury Sec.
400/100 Bps =
Yield (Semi) Y. (Annual)
Yield (Semi)
1.85%
-0.15%
-0.30%
1.90%
-0.10%
-0.20%
2.00%
0.00%
0%
0.20%
2.10%
0.10%
0.50%
2.25%
0.25%

4%
Y. (Annual)
Par Value
3.70%
100
3.80%
4.00%
4.20%
4.50%

0.38%
0.58%
0.63%
0.75%
1.00%

0.75%
1.16%
1.25%
1.50%
2.01%

2.38%
2.58%
2.63%
2.75%
3.01%

3. What is the implied YTM for such bond?

Settlement
Maturity
Coupon
Face Value
PV
YTM

1/1/2010
1/1/2015
3%
100.00
87.49
5.93%

4.75%
5.16%
5.25%
5.50%
6.01%

apping technique and data in excel document Maturity & YTM for 10 Hypothetical European Treas

h are zero coupon securities)

European Treasury Sec.

Yield (Semi) Y. (Annual)
-0.15%
-0.30%
-0.10%
-0.20%
0.00%
0%
0.20%
0.10%
0.50%
0.25%
0.75%
0.38%
1.16%
0.58%
1.25%
0.63%
1.50%
0.75%
2.01%
1.00%

l)

Price

CF

100.00 CF
100.00 CF
100.00 CF
100.00 CF
100.00 CF
100.00 CF
100.00 CF
100.00 CF

0.5

0.00
0.10
0.24969
0.3736
0.50
0.62112
0.74442
0.99

1.5

0.00 100.00
0.10
0.10
0.25
0.25
0.37
0.37
0.49
0.49
0.62
0.61
0.74
0.73
0.98
0.97

99.70
0.25
0.37
0.49
0.61
0.73
0.96

2.5

99.00
0.368
0.486
0.606
0.723
0.95

Additional Comment:

4.5

The yield curve is a normal one. This curve indicates that the longer-term
bonds will have the possibility to rise signaling periods of expansion.
While some investors expect longer-maturity bond yields to become even
higher in the future, others would temporarily put their funds in shorterterm securities in hopes of purchasing longer-term bonds later for higher
yields, taking more risk. In a rising interest rate environment, it is risky to
have investments tied up in longer-term bonds when their value has yet
to decline as a result of higher yields over time. The increasing temporary
demand for shorter-term securities pushes their yields even lower, setting
in motion a steeper up-sloped normal yield curve.

bond (semi- annual coupons), requiring a European Treasury + 400 basis points

Coupon
3%

Years

Periods
5

CF
1 1.4728
2 1.4446
3 1.41
4 1.3803
5 1.3421

6 1.30
7 1.255
8 1.2192
9 1.18
PV
10 75.489 87.4943

etical European Treasury securities

3.5

98.14
0.48 97.06
0.60 0.60 95.73
0.72 0.71 0.706
0.94 0.94 0.93

at the longer-term
of expansion.
s to become even
funds in shorterds later for higher
ment, it is risky to
eir value has yet
reasing temporary
even lower, setting

4.5

94.2
0.92

91