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Unformatted text preview: 71Chapter 7Non Flat Term Structure72NotationR0,1 = 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.73R0,1TimeSpot interest rates12R0,274Oneperiod Present ValuePV1=11 + R0,10.9615 = 11.0411$1S1= 96.15 = 1001.04100S1= Oneperiod strip75Twoperiod Present ValuePV2=1(1 + R0,2)2S2= Twoperiod strip0.8573 = 1(1.08)211$1S2= 85.73 = 100(1.08)2100276nperiod Present ValuePVn=1(1 + R0,n)n0.4665 = 1(1.10)81$1S8= 46.65 = 100(1.10)8100n771/(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)278PV1≥PV2≥. . . ≥PVn≥1at timereceived$1ofluePresent va2at timereceived$1ofluePresent vanat timereceived$1ofluePresent va≥… ≥79Oneperiod StripPrice ofoneperiodstrip= S1= [PV1][PAR]S1= = 100 = 96.15.1,R1PAR+04.11710Twoperiod StripPrice oftwoperiodstrip= S2= [PV2][PAR] S2= = 100 = 85.73.22,)R1(PAR+2)08.1(1711Cash flows for treasury strip with price SnPoints in time1…nCash flows –Sn0 … 0… +PAR712strip.aofparofdollarperPricePARstripperiodnofPricentimeatreceived$1ofValuepresentThePARSPVnn===713Finding the Term Structure of Interest Rates from Treasury Strips714Oneperiod StripSince S1= 1,R1PAR+1 + R0,1= = = 1.041SPAR15.96100R0,1= 0.04 = 4%.715...
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This note was uploaded on 06/07/2011 for the course FIN 4243 taught by Professor Dudley during the Spring '08 term at University of Florida.
 Spring '08
 DUDLEY
 Debt, Interest, Interest Rate

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