CH07 - 7-1Chapter 7Non Flat Term Structure7-2NotationR0,1 =...

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Unformatted text preview: 7-1Chapter 7Non Flat Term Structure7-2NotationR0,1 = the spot interest rate observed at time 0 (first subscript) and lasting one period of time.R0,2 = the spot interest rate observed at time 0 (first subscript) and lasting two periods.7-3R0,1TimeSpot interest rates12R0,27-4One-period Present ValuePV1=11 + R0,10.9615 = 11.0411$1S1= 96.15 = 1001.04100S1= One-period strip7-5Two-period Present ValuePV2=1(1 + R0,2)2S2= Two-period strip0.8573 = 1(1.08)211$1S2= 85.73 = 100(1.08)210027-6n-period Present ValuePVn=1(1 + R0,n)n0.4665 = 1(1.10)81$1S8= 46.65 = 100(1.10)8100n7-71/(1 + R0,1) or 1/(1 + R0,2)2? orWhich of the following can be true?a.LHS > RHSb.LHS = RHSc.LHS < RHSd.It depends.e.None of the above.11 + R0,11(1 + R0,2)27-8PV1PV2. . . PVn1at timereceived$1ofluePresent va2at timereceived$1ofluePresent vanat timereceived$1ofluePresent va 7-9One-period StripPrice ofone-periodstrip= S1= [PV1][PAR]S1= = 100 = 96.15.1,R1PAR+04.117-10Two-period StripPrice oftwo-periodstrip= S2= [PV2][PAR] S2= = 100 = 85.73.22,)R1(PAR+2)08.1(17-11Cash flows for treasury strip with price SnPoints in time1nCash flows Sn0 0 +PAR7-12strip.aofparofdollarperPricePARstripperiod-nofPricentimeatreceived$1ofValuepresentThePARSPVnn===7-13Finding the Term Structure of Interest Rates from Treasury Strips7-14One-period StripSince S1= 1,R1PAR+1 + R0,1= = = 1.041SPAR15.96100R0,1= 0.04 = 4%.7-15...
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CH07 - 7-1Chapter 7Non Flat Term Structure7-2NotationR0,1 =...

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