Zero rates


Problem 3)   

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Using the four “zero rates” from the Example slide, use Goal Seek to find the Par Yield of a two year semi-annual bond.  Hint: Discount each cash flow using the appropriate zero rate, calculate the price, and then find the coupon that sets this price equal to $100 using Goal Seek.


Problem 4)


Consider another two year semi-annual bond with a coupon of 5% (annualized) and a price of $105.  You are given that the .5 year zero rate is 2.0%, 1 year zero rate is 2.1% and 1.5 year zero rate is 2.2%.  Use Goal Seek to “bootstrap” to find the 2-year zero rate.


Problem 5)


Suppose you are given the following zero rates:



Find the one year forward rates for years 2 thru 5.  (T2 – T1 = 1 for all four calculations).



Problem 6)


  1. a) Consider a 5-year semiannual bond with a coupon of 5% (annualized) and a yield of 6.00% Calculate its price and then its duration.


  1. b) Now calculate the price again by changing the yield to 6.50%. Show that



holds approximately.  What is the error?


  1. c) Now calculate the Convexity. Repeat part b) using



Does this reduce the error?




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