Reference no: EM131943623

Assignment -

Providing the numerical results is necessary but not sufficient, so please be sure to explain what you are doing. Your report must contain a description and a separate spreadsheet containing your calculations.

1. The term structure of interest rates: The sheet "OTR", in the spreadsheet AcF304_HW_2018_data.xlsm contains yields of the most recently issued ("on the run") T-bills, notes and bonds. a) Interpolate linearly, to get the yields for maturities 0.5, 1.0, ..., 30.0 years. b) Use these yields, and the Bootstrapping methodology, to compute the spot rate curve on a 6 monthly basis, out to 30 years. c) Compute one forward rate curve of your choice based on the spot rate curve. For example, calculate 1fi or 2fi for any I, or if2 for any i. You must say what forward rate you are computing.

2. Stripping/reconning: The spreadsheet also gives all the CI-strips prices and some of the PIstrips prices, on the maturity cycle 15 May - 15 November, and some strippable notes and bonds, in the sheet Notes&bonds. Find arbitrage opportunities in this data under the STRIPS program, using this data. Assume that bonds, notes and STRIPS can be bought and shorted at the ask and the bid prices given respectively. Full marks will be awarded, if you can find 4 arbitrages.

3. Z-spreads: Select two corporate bonds for the same company. One bond must be option-free; the other bond must have an embedded option. a) Compute their z-spreads over the Treasury spot rate curve, as calculated in Question 1. Write a short statement explaining whether these Z-spreads are as expected. b) Calculate the yield-duration of the corporate securities, by considering a change of 25 bps in the spot rate curve. c) Calculate the z-spread-duration of the corporate securities, by considering a change of 25 bps in the z-spreads.

Length of the report: the report (excluding the spreadsheet) should not be more than 4 pages (not including the title page and any references).

Attachment:- Assignment Files.rar