Section__2_Bonds_Solutions

# Section__2_Bonds_Solutions - Section #2 Solutions Bond...

This preview shows pages 1–7. Sign up to view the full content.

Section #2 Solutions Bond Exercises January 28th, 2009 Copyright 2009 by Rich Curtis

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
1. Bond Yields, Spot Rates, and Forward Rates Time 0 Time 1 Time 2 Time 3 Price CF CF CF 1-Year Note: \$10,381 \$10,900 2-Year Note: \$10,282.60 \$750 \$10,750 3-Year Note: \$9,841.40 \$600 \$600 \$10,600
Yield-to-Maturity Expression P 0 = CF 1 1+ y + CF 2 (1+ y) 2 + CF 3 (1+ y) 3 + . .. + CF T (1+ y) T Spot Rate Expression P 0 = CF 1 1+r 0,1 + CF 2 (1+r 0,2 ) 2 + CF 3 (1+r 0,3 ) 3 + . .. + CF T (1+r 0,T ) T Forward Rate Expression P 0 = CF 1 1+r 0,1 + CF 2 (1+r 0,1 )(1+ f 1,2 ) + CF 3 (1+r 0,1 )(1+ f 1,2 )(1+ f 2,3 ) + . .. + CF T (1+r 0,1 )(1+ f 1,2 )(1+ f 2,3 ) . .. (1+ f T -1,T )

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
a. Use the 1-year Treasury Note and solve the spot rate expression for r 0,1 : P 0 = CF 1 1 + r 0,1 \$10,381.00 = \$10,900.00 1 + r 0,1 r 0,1 = .05
b. Use the 3-year Treasury Note and the yield-to-maturity expression: P 0 = CF 1 1+y + CF 2 (1+y) 2 + CF 3 (1+y) 3 It can be shown that y = .066 or 6.60%. \$9,841.40 = \$600 1 + y + \$600 (1 + y) 2 + \$10,600 (1 + y) 3

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Use the 1-year spot rate r 0,1 and the 2–year Treasury Note to solve the forward rate expression for f 1,2 : P 0 = CF 1 1+r 0,1 + CF
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 09/03/2009 for the course AEM 3240 taught by Professor Curtis,r. during the Spring '07 term at Cornell.

### Page1 / 17

Section__2_Bonds_Solutions - Section #2 Solutions Bond...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online