Find the discount factors and linear interpolation, Mathematics

Question:

All rates should be calculated to 3 decimal places in % (e.g. 1.234%), the discount factors to 5 decimal places (e.g. 0.98765), and the bond prices to 3 decimal places (e.g. 99.999).

You are given the following yields-to-maturity for semi-annually coupon paying Treasury Bonds on 31st December 2007 and 31st December 2008:

Term                              0.5yr      1yr          2yr          3yr          5yr          7yr          10yr

31 Dec 2007        3.49%     3.34%    3.05%    3.07%    3.45%    3.70%     4.04%

31 Dec 2008        0.27%     0.37%    0.76%    1.00%    1.55%    1.87%     2.25%

(1) Using linear interpolation to estimate any other required rates, find the discount factors D(t) for t = 0.5, 1.0, 1.5, ..., 10.0 for both dates.

(2) From your answers to (1), calculate the price of a constant-maturity 3-year semi-annual coupon bond1 with an annual coupon rate of 3% and the face value 100, for both 31 December 2007 and 31 December 2008. Hence analyse the price change.

(3) Again from your answers to (1), find the 6-month forward rates f(t,t+½) for t = 0.5, 1.0, 1.5, ... , 9.5 for both dates.2 (See Appendix for the explanation for forward rates.)

You are also given the following historical data on the spot 6-month rate:

Date           31/12/07        30/06/08               31/12/08                30/06/09            31/12/09

6m Rate     3.49%               2.17%                   0.27%                    0.35%                  0.20%

30/06/10    31/12/10        30/06/11               30/12/11             29/06/12            31/12/12

 0.22%          0.19%             0.10%                 0.06%                    0.16%                   0.11%

(4) Using a graph, comment on how well the market predicted the future moves of the spot 6-month rate on both dates.

(5) In general, are forward rates a good predictor of future interest rates? Briefly discuss.

Posted Date: 2/16/2013 12:08:06 AM | Location : United States







Related Discussions:- Find the discount factors and linear interpolation, Assignment Help, Ask Question on Find the discount factors and linear interpolation, Get Answer, Expert's Help, Find the discount factors and linear interpolation Discussions

Write discussion on Find the discount factors and linear interpolation
Your posts are moderated
Related Questions
state tha different types of models used in operations research.

Diagonals of a trapezium divide each other proportionally: Given : In trapezium ABCD , AB// DC R.T.P :AO/OC = BO/OD Construction: Draw the line PQ; parallel to AB or C

Give an example of Numerator and Denominator? Fractions represent parts of a whole object. Fractions are written using a horizontal line, with one number on top of the line and

Doing these sums initially in this way helps children see why they carry over numbers to the next column. You may like to devise some related activities now. , EI) Give activ

Ellipsoid Now here is the general equation of an ellipsoid. X 2 / a 2 + y 2 /b 2 + z 2 /c 2 = 1 Here is a diagram of a typical ellipsoid. If a = b = c afterw

Solve the following pairs of simultaneous equations by elimination method i.2x+y=10 ii. 3x+y=6 3x-2y=1 5x+y=8 solve the following simult

If there are (2n+1)terms  in an AP ,prove that the ratio of the sum of odd terms and the sum of even terms is (n+1):n Ans:    Let a, d be the I term & Cd of the AP. ∴ ak =

how do u do fractions on a nummber line

what is classification and how can you teach it?