Find the discount factors -linear interpolation, Mathematics

Find the discount factors -Linear interpolation:

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: 2/14/2013 4:49:31 AM | Location : United States

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

Write discussion on Find the discount factors -linear interpolation
Your posts are moderated
Related Questions
What is the Definition of Finite and infinite sets?

The Definition- The definition of the Laplace transforms. We will also calculate a couple Laplace transforms by using the definition. Laplace Transforms- As the earlier secti

What is Slope of a Line ? A line can have a "steep" slope or a "gradual" slope. slope = rise/run The "rise" is the distance going up or down. The "run" is the distance goin

It takes the moon an average of 27.32167 days to circle the earth. Round this number to the closest thousandth. The thousandths place is the third digit to the right of the dec

Polar Coordinates Till this point we've dealt completely with the Cartesian (or Rectangular, or x-y) coordinate system.  Though, as we will see, this is not all time the easie

Jocelyn has 6 birds, Their mean age is 10. The mode of their ages is 8. What might their ages be? Show your work.

For the initial value problem y' + 2y = 2 - e -4t , y(0) = 1 By using Euler's Method along with a step size of h = 0.1 to get approximate values of the solution at t = 0.1, 0

Dividing Mixed Numbers Dividing mixed numbers is a 3-step process: 1. Convert the mixed numbers to improper fractions. 2. Divide the fractions 3. Convert the result ba