Valuation using treasury spot rates, Financial Management

To understand how treasury spot rates are used to calculate the arbitrage-free value of the treasury security, we will take imaginary treasury spot rates (given in the third column of the Table No.6) to find the value of 7% 5-year treasury security. Sum of the present value (given in the last column of the Table No.1) is the arbitrage-free value for the 7% 5-year treasury security.

Table 1: Determination of the Arbitrage-Free Value of a 7% 5-Year Treasury Security

(a)

(b)

(c)

(d)

(e)

Period

Years

Cash Flow in Rs.

Spot Rate in %

PV in Rs.

  1

0.5

    3.5

2.7589

  3.4524

  2

1.0

    3.5

3.0356

  3.3961

  3

1.5

    3.5

3.2856

  3.3330

  4

2.0

   3.5

3.5563

  3.2617

  5

2.5

    3.5

3.8659

  3.1805

  6

3.0

    3.5

4.1068

  3.0982

  7

3.5

    3.5

4.3574

  3.0099

  8

4.0

    3.5

4.6012

  2.9177

  9

4.5

    3.5

4.9812

  2.8049

10

5.0

103.5

5.1225

80.3725

Arbitrage-Free Value of a 7%  5-Year  Treasury Security is =

108.8268                              

Posted Date: 9/10/2012 6:09:31 AM | Location : United States







Related Discussions:- Valuation using treasury spot rates, Assignment Help, Ask Question on Valuation using treasury spot rates, Get Answer, Expert's Help, Valuation using treasury spot rates Discussions

Write discussion on Valuation using treasury spot rates
Your posts are moderated
Related Questions

Q. Scope of the content of the finance function? 1) Estimating of the finance requirement: the first task of a finance manager is to estimate and short terms and long terms fin

what type of financing is appropriate to each fim

An investor, who wants to sell a bond even before it reaches its maturity date, would be concerned as to whether he will receive a price that is close to the true

Based on the period involved in repayment of the debt obligations, the debt instruments could be classified into long-/medium-/short-term debt instruments.

Extent of Financing Required It is clear that sales are unsure with low, high and medium estimates of demand. This of itself gives a few uncertainty but the reliability and pr

What are the advantages and the disadvantages of a new stock issue? A new stock issue increases funds and reduces the riskiness of the firm. It as well tends to send a negative

School of Business BUACC1521 Personal Financial Planning ASSIGNMENT 1. General information As detailed in the Course Description, the assignment constitutes 30% of the tota

All treasury securities are issued on the basis of auction. The auction process is computerized and hence qualified broker-dealers can access it electronically. T

Bond - One type of long-term PROMISSORY NOTE, often issued to the public as a SECURITY regulated under federal securities laws or state BLUE SKY LAWS. Bonds can eitherbe registered