Find the discount factors and linear interpolation, Mathematics

Assignment Help:

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.


Related Discussions:- Find the discount factors and linear interpolation

The coordinate axes, Trace the curve y 2 = (x + 2) 2 (x - 6). Clearly sta...

Trace the curve y 2 = (x + 2) 2 (x - 6). Clearly state all the properties you have used for tracing it(e.g., symmetry about the axes, symmetry about the origin, points of interse

What is identities and contradictions, What is Identities and Contradiction...

What is Identities and Contradictions ? Look at this equation: x + 1 = 1 + x It happens to be true always, no matter what the value of x. (Try it out! What if x is 43?)

Shares and dividends, suresh invested rs.1080 in shares of face value rs.50...

suresh invested rs.1080 in shares of face value rs.50 at rs.54.After receiving dividend on them at 8% he sold them at 52.In each of the transaction he paid 2 % brokerage.Hpw much d

Group automorphism, (a) Find an example of groups G, H, K with K  H and H...

(a) Find an example of groups G, H, K with K  H and H G but K G. (b) A subgroup H of G is characteristic if σ(H) ⊆ H for every group automorphism σ of G. Show that eve

Right angled triangle, In proving relation of trigonometric ratios we becam...

In proving relation of trigonometric ratios we became confused that what should we do next, so to complete any question quickly what should we do?

Trigonometry, explain the formular for finding trigonometry

explain the formular for finding trigonometry

Create a circular table with no restrictions, 1. Four different written dri...

1. Four different written driving tests are administered by a city. One of these tests is selected at random for each applicant for a drivers license. If a group of 2 women and 4 m

Complementary addition-word problems related to subtraction, Complementary ...

Complementary addition -what number how many things should be added to one number or group to get the other. (e.g., a classroom can seat 50 children, and 20 children are already s

Math, i have problems with math and my teacher said that i am still progres...

i have problems with math and my teacher said that i am still progressing in math

Ratio-categories of situations requiring division , Ratio - situations in ...

Ratio - situations in which we need to compare two quantities in terms of their ratio. (e.g., if Munna weighs 40 Kg. and Munni weighs 50 Kg., find the ratio of their weights.)

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd