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    Lec 12

    Uploaded by

    Ryan Groff
    This document provides spot rates for 1, 2, and 3-year zero coupon bonds (ZCBs). It also provides information about yield to maturity (YTM) calculations for plain vanilla bonds with different coupon rates and maturities. It discusses the relationship between spot rates, yield curves, and forward rates.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd

    Lec 12

    Uploaded by

    Ryan Groff
    13 views5 pages
    This document provides spot rates for 1, 2, and 3-year zero coupon bonds (ZCBs). It also provides information about yield to maturity (YTM) calculations for plain vanilla bonds with different coupon rates and maturities. It discusses the relationship between spot rates, yield curves, and forward rates.

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    LEC-12

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    This document provides spot rates for 1, 2, and 3-year zero coupon bonds (ZCBs). It also provides information about yield to maturity (YTM) calculations for plain vanilla bonds with different coupon rates and maturities. It discusses the relationship between spot rates, yield curves, and forward rates.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    13 views5 pages

    Lec 12

    Uploaded by

    Ryan Groff
    This document provides spot rates for 1, 2, and 3-year zero coupon bonds (ZCBs). It also provides information about yield to maturity (YTM) calculations for plain vanilla bonds with different coupon rates and maturities. It discusses the relationship between spot rates, yield curves, and forward rates.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 5

    Spot Rates

    Assume time is measured in years to keep things simple (not half years) Face value of all bonds is 1000
    Price
    1 Year ZCb 972 2.8807%
    2 Year ZCB 935 3.4175%
    3 Year ZCB 885 4.1563%

    Consider a plain vanilla bond with a face value of 1000 and 3 years to maturity
    The coupon is 6% per annum paid annually
    What is the YTM?
    1 60 ₹ 58.32 This bond is callable after two years
    4.10% 2 60 ₹ 56.10 and if called one year's coupon will be paid as premium
    3 1060 ₹ 938.10 What will be the YTC?
    ₹ 1,052.52 ₹ 1,052.52 Price Coupon = 60 Terminal CF = 1060
    6.0455%
    4.1037% Suppose we have a 3 year Par Bond. What should be the coupon rate
    given the above data?
    Assume the unknown coupon is C andsolve for it

    Price of a Par Bond 1000


    What will be the cash flows C; C; C+1000 0.028807
    0.034175
    0.041563

    1000 = C/(1+.02881) + C/(1+.03418)^2 + C/(1+.04156)^3 + 1000/(1+.04156)^3

    115 2.792

    C 41.18911
    Coupon rate 0.041189
    ill be paid as premium

    60 Terminal CF = 1060
    1 Year ZCB price 950 5.26316%

    2 Year ZCB 825 10.09638%

    Consider two two-year plain vanilla bonds


    A: has a coupon of 5% per annum
    B: has a coupon of 12% per annum
    All bonds have a face value of 1000

    Which of the two plain vanilla bonds will have a higher YTM and why?
    %age
    Price of Bond A ₹ 47.50 0.051984 ₹ 114.00 0.10982659
    ₹ 866.25 0.948016 ₹ 924.00 0.89017341
    ₹ 913.75 ₹ 1,038.00
    9.9675% 9.8159%
    Since the two period spot rate is higehr two period money is more expensive
    So a bond which has a greater percentage of its price in two period money will have a higher YTM

    YTM is a non-linear average of spot rates


    You are trying to impose a single rate on a vector of cash flows, each of which has been discounted using the appropriate spot

    Yield Curve and the Term Structure of Interest Rates


    Yield Curve is a plot of YTMs against the time to mat urity
    The term structure is a plot of Spot Rates versus time to maturity
    Thus the term structure is also known as the Zero Coupon Yield Curve

    There are various shapes of the curve


    Upward sloping - most common
    The longer the term to maturity the higher the rate
    Downward sloping aka Inverted Yield Curves
    The longer the term to maturity the lower the rate
    Humped Yield Curve
    Rates increase with time reach a peak and then decline
    U-shaped Yield Curve
    Rates decline with time, reach a bottom and then start increasing
    unted using the appropriate spot rate
    Forward Rates

    Suppose I want to invest for two years I have two options


    I can buy a two year zero coupon bond
    Or I can buy a one year zero coupon bond and lock in a rate to rollover today itself using a forward contract

    The one year spot rate is 6% per annum


    and the two year spot rate is 7.6% per annum
    what should bde the rollove rate for a such a contract if arbitrage is to be ruled out

    (1.076)^2 = (1.06)*(1+f) One year spot rate is 6%


    Two year spot rate is 7.2%
    1.092242 Three year spot rate is 8.4%

    I want the following forward rates


    1) For a one year loan after a year
    2) For a one year loan after two years
    3) For a two year loan after one year

    1.084136
    1.108404
    ((1.084)^(3))/1.06 = (1+f)^(2)

    1.201661
    1.096203

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