Reference no: EM13910065

Report on the term structure of interest rates

The Excel file contains Treasury bond prices at specific dates. Additional information about each security can be obtained with the CUSIP id number in the FINRA and Fidelity websites. With this dataset, answer accordingly to the following 5 questions. Providing the numerical results is necessary but not sufficient, so please make sure to explain your findings and their meaning. The report must discuss/contain the following SEVEN items:

1. YTM at different Maturities. The Excel Spreadsheet "Treasury Bond Prices" contains the on-the-run Treasury bond bid/ask price quotes on the 13/02/2015 for various maturities.

a) Calculate the yield to maturity from these bond prices for a private buyer of treasury securities

2. Suppose that you are a trader at PIMCO in the Treasury market on 13/02/2015. Search, design and explain an arbitrage-free trade based on the Treasury securities and on the STRIPs that would allow you to earn a profit with the minimum risk possible. For this exercise you will need the information in the Excel Spreadsheet "Treasury Bond Prices" that contains quotes for Treasury securities, and in the Excel Spreadsheet "Treasury STRIPs" that contains quotes for Treasury coupon and principal STRIPs.

3. The term structure of interest rates:

a) Compute intermediate yields (every six months) by linear interpolation

b) Use the Bootstrapping methodology to compute the spot rate curve. Assume a "par yield curve" for nonexistent securities with interpolated maturities.

c) Compute one forward rate curve based on the spot rate curve. For example, calculate the 1fi, or 2fi, or
if2, for any i.

d) What does the yield curve say about the future expected short-term rates?

4. Calculate the z-spread for the bonds issued by Ford Motor Company available in the Excel Spreadsheet "Corporate Bonds". What information contains the Z-spread for these securities?

5. Interest rate risk measurement and bond immunization:
• Calculate the duration of the portfolio of securities in the spreadsheet "Corporate Bonds" assuming you own 1 unit of each security. Use the duration measure that you consider more convenient.
• Discuss the drawbacks/problems/issues of using duration to assess/minimize the interest rate risk of a portfolio.
• Duration immunization assures that parallel changes in interest rates will not affect the value of a portfolio. If we were to add to our portfolio another bond (hedging instrument) called ABS with a duration of 5%, a market price of 100, and a YTM of 4%, how much of this security ABC should we buy to achieve an portfolio with zero duration?

6. Open discussion on "negative interest rates in bond and money markets". Below you can see an example of questions you could explore. It is not necessary to discuss all the points, you can focus on one aspect that you find interesting and relevant:

• Which interest rates are more likely to be negative? Sovereign or corporate? Policy or market rates? Short or long-term maturities? Nominal or real?

• Why do you think negative interest rates are being observed in the market. What recent events are making the interest rates to become negative?

• You can provide recent examples in the news about negative interest rates.

7. Reference List: Make sure to create a reference list with all sources (academic and financial news journals) and link used to obtain information.

Length of the report: the report should not be more than 5 pages (not including the front page and the references). Note that this is the maximum number of pages allowed, and not the recommended number of pages to write.

Attachment:- Homework-Assignment.xlsx