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Estimate term structure of discount factors, spot rates and forward rates by using data on five semi-annual coupon paying bonds with $100 face value each: The bonds, respectively, have 1.25, 5.35, 10.4, 15.15 and 20.2 years to maturity; pay coupon at annual rates of 9.8, 10.8, 11.8, 12.8, and 13.8 percent of face value; and are trading at quoted spot market prices in dollars of 103.8, 104.8, 105.8, 106.8 and 107.8. Specify the discount factor function d(t) by a third degree polynomial with unknown parameters a, b, and c, as done in class. Using estimated d(t) function, determine spot rate and forward rate functions by assuming half-year compounding. Then write the values of the following based on your estimation.

1. Coefficient of parameter a in first bond price equation.

2. Coefficient of parameter b in first bond price equation.

3. Coefficient of parameter c in first bond price equation.

4. Coefficient of parameter a in second bond price equation.

5. Coefficient of parameter b in second bond price equation.

6. Coefficient of parameter c in second bond price equation.

7. Coefficient of parameter a in third bond price equation.

8. Coefficient of parameter b in third bond price equation.

9. Coefficient of parameter c in third bond price equation.

10. Coefficient of parameter a in fourth bond price equation.

11. Coefficient of parameter b in fourth bond price equation.

12. Coefficient of parameter c in fourth bond price equation.

13. Coefficient of parameter a in fifth bond price equation.

14. Coefficient of parameter b in fifth bond price equation.

15. Coefficient of parameter c in fifth bond price equation.

16. Parameter a.

17. Parameter b.

18. Parameter c.

19. Current price of a dollar at 5th year.

20. Current price of a dollar at 7th year.

21. Current price of a dollar at 10th year.

22. Current price of a dollar at 15th year.

23. Spot rate for term 2 year.

24. Spot rate for term 5 year.

25. Spot rate for term 10 year.

26. Spot rate for term 17 year.

27. Forward rate for half year period 2.5 to 3.0 years.

28. Forward rate for half year period 5.5 to 6.0 years.

29. Forward rate for half year period 10.5 to 11.0 years.

30. Forward rate for half year period 15.5 to 16.0 years.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92728123

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