help calculating spot and forward rates (bond market)

T

triptrap

New member
Joined
Jun 27, 2009
Messages
1
Hi guys,
I am doing some exercises on fixed income securities in order to prepare for an exam and I have a question about calculating spot rates given certain bond information:

  • B1 (coupon bond): Price=98, interest=3%, principal=100, maturity=1 year
    B2 (annuity bond): Price=97, interest=3%, principal=100, maturity=2 years
    B3 (coupon bond): Price=85, interest=0%(!), principal=100, maturity=3 years
    B4 (serial bond): Price=96,5, interest=4%, principal=100, maturity=4 years.

I am to calculate all spot and forward rates. My problem is the math. I only have available pen, paper and a very basic calculator (no symbolic operations). My approach is to find the 1-year spot rate from B1, then 2-year spot rate from B2 (by plugging in the 1-year spot rate from B1 and solving for it) and so on. But solving by hand when I have something raised to the power of 3 and 4 is tough. Is this the right approach or is there a simpler way to answer the question?

Also i have doubts about the cash flows of the annuity and serial bond. I have calculated the cash flows of the annuity bond to be 52.26 each. Is this correct?

Any help is very much appreciated

/Mads
 
triptrap said:
B2 (annuity bond): Price=97, interest=3%, principal=100, maturity=2 years

I have calculated the cash flows of the annuity bond to be 52.26 each. Is this correct?
Click to expand...
Correct, if the 3% is annual compounding.
So you're "lending" $97 which will be paid back to you with 2 payments of $52.26.

Idon't know enough about spot rates et al to help further;
I'm sure Sir Hunny will ride in to the rescue, possibly Sir Jonah with the hiccups :wink:
 
Holy Moly Sir J, this guy Samuel A. Broverman wrote a 521 pages book on financial contortions!
 
You must log in or register to reply here.
Top