Date: Wednesday, March 21, 2007
Case: Pricing Strips and the Term Structure (UVA-F-0925)
Read:
1. Interest Rates, Market Pricing, and Compounding (UVA-F-1517)
2. Spot and Forward Interest Rates (Draft)
3. BMA, Chapter 23 through page 641 (Supplemental Reading)
Network File: Strip.xls
Class Objective:
Cover the basics of term structure of interest rates, including the relationships among yields to maturity, spot interest rates and forward interest rates
Assignment:
1. What is the yield to maturity on the 2-year and 5-year bonds quoted in Table 1?
2. What are the spot rates for the first 2-years implied by the zero coupon bonds in Table 2?
3. What are the spot rates for the first 2-years implied in the coupon bond prices shown in Table 1? (Use the bootstrap approach to estimate the spot rates). How do these spot rates compare to those in question 2?
4. What is the relationship between the yield to maturity on the 2-year bond and the spot rates for the first two years?
5. What is the forward interest rate from month 18 through month 24?
6. Plot the yield curve and the term structure of interest rates implied in Tables 1 and 2. What does the term structure tell you about future interest rates?