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Unformatted text preview: Fin 448: FixedIncome 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 semiannual coupons (the coupon rate is also annualized). We want to extract semiannually 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 zerocoupon bond price, and y k is the annualized zero yield. (1.1) Compute p . 5 and y . 5 , using the quotes for the 6month Treasury. Table 1: Excoupon 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 1year Treasury to compute...
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This note was uploaded on 10/06/2011 for the course FIN 448 taught by Professor Weiyang during the Spring '10 term at Rochester.
 Spring '10
 WeiYang

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