Homework 1

Homework 1 - Fin 448 Fixed-Income Securities Homework 1 Wei...

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Unformatted text preview: Fin 448: Fixed-Income Securities Homework 1 Wei Yang Assigned: Mar 31 Due: Apr 7 Each problem counts as 10 points. 1 Bootstrapping In this problem we extract zero yields from coupon bond prices through a basic and intuitive approach called “bootstrapping”. Table 1 lists the prices of selected U.S. government, or Treasury securities. These secu- rities pay semi-annual coupons (the coupon rate is also annualized). We want to extract semi-annually compounded zero yields. Recall the price of a coupon bond with $1 face value is given by P = p . 5 c 2 + p 1 c 2 + p 1 . 5 c 2 + ... + p n 1 + c 2 p k = 1 ( 1 + y k 2 ) 2 k where c is the annualized coupon rate, p k is the zero-coupon bond price, and y k is the annualized zero yield. (1.1) Compute p . 5 and y . 5 , using the quotes for the 6-month Treasury. Table 1: Ex-coupon prices of Treasury securities Coupon rate (%) Time to maturity Price per $100 6 mo 98.16 3.500 1 yr 99.50 6.625 1.5 yr 103.31 4.250 2 yr 99.63 1 (1.2) Use p . 5 and the quotes for the 1-year Treasury to compute...
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Homework 1 - Fin 448 Fixed-Income Securities Homework 1 Wei...

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