Scribd Logo
Upload

Welcome to Scribd!

  • Session 2 Illustration

    Uploaded by

    Chandru Jeyaram
    3 views5 pages
    This document contains information about spot rates, forward rates, and bond pricing: 1) It shows the prices of zero-coupon bonds maturing in 1, 2, and 3 years with corresponding spot rates of 4.17%, 5.2%, and 5.57%. 2) It then uses the 1-year and 3-year spot rates to calculate the 2-year forward rate between years 1 and 3 as 6.27%. 3) As an example of bootstrapping spot rates, it assumes the 2-year rate is unknown and calculates it as 5.22% using the 1-year rate and 1-3 year forward rate.

    Original Description:

    Original Title

    Session 2 illustration

    Copyright

    © © All Rights Reserved

    Available Formats

    XLSX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    This document contains information about spot rates, forward rates, and bond pricing: 1) It shows the prices of zero-coupon bonds maturing in 1, 2, and 3 years with corresponding spot rates of 4.17%, 5.2%, and 5.57%. 2) It then uses the 1-year and 3-year spot rates to calculate the 2-year forward rate between years 1 and 3 as 6.27%. 3) As an example of bootstrapping spot rates, it assumes the 2-year rate is unknown and calculates it as 5.22% using the 1-year rate and 1-3 year forward rate.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    3 views5 pages

    Session 2 Illustration

    Uploaded by

    Chandru Jeyaram
    This document contains information about spot rates, forward rates, and bond pricing: 1) It shows the prices of zero-coupon bonds maturing in 1, 2, and 3 years with corresponding spot rates of 4.17%, 5.2%, and 5.57%. 2) It then uses the 1-year and 3-year spot rates to calculate the 2-year forward rate between years 1 and 3 as 6.27%. 3) As an example of bootstrapping spot rates, it assumes the 2-year rate is unknown and calculates it as 5.22% using the 1-year rate and 1-3 year forward rate.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 5

    1 0 0.

    166667 0
    2 0 0.166667 0
    3 0 0.166667 0
    4 100 0.166667 16.66667
    5 300 0.166667 50
    6 500 0.166667 83.33333

    Expected winning 150


    Interest rate 6%
    Time 1 year

    Fair value 141.5094


    Year Age P(Death) E(Claim) Spot rt PV
    1 25 0.20% 200 5.80% 189.0359 =D4/(1+E4)^A4
    2 26 0.30% 300 5.90% 267.5034 =D5/(1+E5)^A5
    3 27 0.30% 300 6.00% 251.8858 =D6/(1+E6)^A6

    708.4251
    Original rate --> 5.567% 1.000% <-- Reinvestment rate

    85 4.731711 4.826819
    4.731711 4.779028
    4.731711 4.731711

    14.19513 14.33756
    99.33756

    T to M* Price int rt 𝐹𝑉=𝑃𝑉∗(1+𝑖)^𝑛


    1 96 4.17% =(100/C13) - B13
    2 91 4.83% =(100/C14)^(1/B14)-1
    (𝐹𝑉/𝑃𝑉)^(1/𝑛)−1
    3 85 5.57% =i

    earning earnings
    over L over S
    L-S Rate
    F(1,2) 9.657% 4.17% 1 5.49% =(C18 - D18)/E18
    F(1,3) 16.700% 4.17% 2 6.27% =(C19 - D19)/E19
    F(2,3) 16.700% 9.657% 1 7.04%
    *Time to maturity

    Boot strapping spot rates with forward rates


    Example 1
    Assume that 2 year zero coupon bond doesn't exist
    Compute the two year spot rate using 1yr spot rate rate F(1,3)

    T to M* Price Spot rt
    1 96 4.17% 0-2 5.22% 2
    2? 5.2% 6.27% 0-1 4.17% 1
    3 85 5.57% 1-2 6.27% 1

    Example 2
    3 year spot rate is 6%
    F(3,4) is 6.5%

    What is the expected four year spot rate?-


    Tenure Rt p.a Total rtn
    L 4 6.1% 24.5%
    S 3 6.0% 18.0%
    F(3,4) 1 6.5% 6.5%

    Exercise
    6 year spot rate is 6%
    F(6, 8) is 7%

    What is 8 year spot rate?


    Tenure Rt p.a Total rtn
    L 8 6.3% 50.0%
    S 6 6.0% 36.0%
    F(6,8) 2 7.0% 14.0%
    <-- Expected annual rate

    You might also like