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Zero Coupon Bonds

Coupon rate 8% Coupon Rate 0%


Face value 100 Face value 100
Exhibit-1 Exhibit-2
Bond Maturity Price Bond Maturity Price
0.5 100 0.5 96.154
1 99.894 1 92.354
1.5 99.692 1.5 88.607
2 99.399 2 84.918
2.5 99.027 2.5 81.294
3 98.581 3 77.738
3.5 98.069 3.5 74.256
4 97.502 4 70.855
4.5 96.878 4.5 67.53
5 96.213 5 64.293
0 0.5 1 1.5
Ques 4 4 4
1 calculate ytm for 2 year and 5 year bond for exhibit 1
2 what are the spot rates for the first 2 years implied by ZCBs in e 1 1 1
3 what are the spot rates for the first 2 years implied by bonds i 4 4 4
4 what are the spot rates for the first 2 years implied by bonds i 116
5 forward interest rate from month 18 through 24
6 plot yield curve and term structure in both exhibits. What does term structure tell about future interest rates
ytm
Bond Maturity spot rate
8% 0.5
9% 1
1.5
2

2
104

1
104

about future interest rates


Coupon rate 8% settlement
Face value 100 maturity
Exhibit-1 maturity
Bond Maturity Price
0.5 100 yield for 2 years
1 99.894 nper
1.5 99.692 pmt
2 99.399 FV
2.5 99.027 PV
3 98.581 YTM (rate function)
3.5 98.069 YTM(Yield funciton)
4 97.502
4.5 96.878
5 96.213
using goal seek

using goal seek

using cal ytm


3.8320758191
96.9591943916
1/1/2000
1/1/2002
1/1/2005

yield for 2 years yield for 5 years


4.00 nper 10.00
4 pmt 4
100 FV 100
-99.399 PV -96.213
4.17% 8.33% YTM 4.48% 8.96%
8.33% YTM(YIELD FUNCTIO 8.96%

0.5 1 1.5 2 verified by finding price


4 4 4 104 using cal ytm
8.51% 3.843092 3.692338
1.0416621804 1.0850600981 1.130266 1.1773554166 99.69978
3.8400165381 3.6864317533 3.53899 88.3335639656
99.3990019819

0.5 1 1.5 2 2.5 3 3.5


4 4 4 4 4 4 4
9.16%
1.044780095 1.0915654469 1.140446 1.1915151249 1.24487129 1.300617 1.358858
3.8285568601 3.6644619077 3.5074 3.3570702682 3.2131836 3.075464 2.943647
96.2135526303

3.6712012708 3.5170804042 3.36943 3.2279775123 3.09246364 2.962639 2.838264


y finding price

3.547499 88.61685

4 4.5 5
4 4 104

1.419708 1.483283 1.549705


2.81748 2.696721 67.10957

2.719111 67.72895
Zero Coupon Bonds The zero coupon bonds represent a
Coupon Rate 0% yield curve known as zero curve or
Face value 100 spot curve.
Exhibit-2
Thus the YTM of these ZCB gives us
respective spot rates for that partic
Bond Maturity Price
maturity
0.5 96.154
1 92.354
1.5 88.607
2 84.918
2.5 81.294
3 77.738
3.5 74.256
4 70.855 T PRICE
4.5 67.53 0.5 96.154
5 64.293 1 92.354
1.5 88.607
2 84.918
pon bonds represent a
nown as zero curve or the

M of these ZCB gives us the 1/1/2000


ot rates for that particular
6/30/2000
12/31/2000
6/30/2001
12/31/2001

YTM/SPOT RATE
8.04%
8.14%
8.24%
8.36%
Coupon rate 8%
Face value 100
Exhibit-1
Bond Maturity Price BOOTSTRAPPING FROM ZCB
0.5 100 8% 8.04%
1 99.894 8.22% 8.14%
1.5 99.692 8.40% 8.24%
2 99.399 8.52% 8.36%
2.5 99.027
3 98.581
3.5 98.069
4 97.502
4.5 96.878
5 96.213
finding the 1 year spot rate
T 0.5 1 using goal seek
CASH FLOW 4 104
discount factor 8% 0.041104 8.22%
PV 99.894 3.849002 99.894

finding the 1.5 year spot rate


T 0.5 1 1.5 using goal seek
CASH FLOW 4 4 104
Discount factor 8% 8.22% 8.40%
PV 3.849002 3.69615 92.14747
99.69263
using goal seek
finding the 2 year spot rate
T 0.5 1 1.5 2
CASH FLOW 4 4 4 104
Discount factor 8% 8.22% 8.40% 8.52%
PV 3.849002 3.69615 3.544134 88.30972
99.399
what is the relation between ytm on 2 year bonds and the
YTM 2 YEAR BOND 8.332%

spot rates T=0.5 8.000% 8.33%


T=1 8.221% 8.33%
T=1.5 8.401% 8.33% 8.33% 8.33%

T=2 8.521% 8.33% 8.221%

8.000%

T=0.5 T=1
n 2 year bonds and the spot rate in first 2 years

8.521%

8.401%
33% 8.33% 8.33% 8.33%

8.221%

00%

0.5 T=1 T=1.5 T=2


spot rates with bootstrapping
T=0.5 8.000%
T=1 8.221%
T=1.5 8.401% 1.128626
T=1 8.521% 1.177673
1.043458
4.35%
8.69%
(1+s3)^3
(1+s4)^4
(1+f)

(1+S1.5)^1.5*(1+f0.5,
1.5-2)^1=(1+s2)^2
price of
coupon price of Time to
Saturday, January 01, 2000 bonds zcb maturity
Saturday, July 01, 2000 0.5 100 96.154 0.5
Monday, January 01, 2001 1 99.894 92.354 1
Sunday, July 01, 2001 1.5 99.692 88.607 1.5
Tuesday, January 01, 2002 2 99.399 84.918 2
Monday, July 01, 2002 2.5 99.027 81.294 2.5
Wednesday, January 01, 2003 3 98.581 77.738 3
Tuesday, July 01, 2003 3.5 98.069 74.256 3.5
Thursday, January 01, 2004 4 97.502 70.855 4
Thursday, July 01, 2004 4.5 96.878 67.53 4.5
Saturday, January 01, 2005 5 96.213 64.293 5

spot curve

9.200% 9.032%
9.000% 8.917%
f(x) = 5.36210567020113E-07x^3 - 3.01757473177251E-06x^2 + 0.0022967489x
8.802% + 0.078848941
8.800% 8.688%
8.573%
8.600% 8.458%
8.344%
8.400% 8.229%
8.200% 8.114%
8.000%
8.000%
7.800%
7.600%
7.400%
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
spot rates from ZCB
YTM
8.0000% 8.000% Yield curve
8.1125% 8.114% 9.2000%
8.2224% 8.229% 8.9562%
9.0000%
8.3324% 8.344% f(x) = - 0.000000059x^3 - 0.000029321x^2 + 0.0022877056x
8.8562%
8.7536% + 0.0788639027
8.4398% 8.458% 8.8000%
8.6512%
8.5462% 8.573% 8.5462%
8.6000%
8.6512% 8.688% 8.4398%
8.4000% 8.3324%
8.7536% 8.802%
8.2224%
8.8562% 8.917% 8.2000% 8.1125%
8.9562% 9.032% 8.0000%
8.0000%

7.8000%

7.6000%

9.032% 7.4000%
8.917% 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
06x^2 + 0.0022967489x
8.802% + 0.0788489412
8.688%
%

3.5 4 4.5 5 5.5 Yield curve vs spot curve

9.200%

9.000%
f(x) = - 7.36964834537548E-09x^3 - 7.33025102885171E-06x^2 + 0.00114
8.800%

8.600%

8.400%

8.200%

8.000%

7.800%

7.600%

7.400%
0.5 1 1.5 2 2.5 3 3.5 4
7.800%

7.600%

7.400%
0.5 1 1.5 2 2.5 3 3.5 4
8.9562%
8.8562%
877056x
8.7536% + 0.0788639027
%

4 4.5 5 5.5

rve vs spot curve

- 7.33025102885171E-06x^2 + 0.0011438528x + 0.0788639027

2.5 3 3.5 4 4.5 5


2.5 3 3.5 4 4.5 5