A NSW ERS TO Q UESTIONS & P ROBLEM S

Chapter 14 - The Term Structure of Interest Rates

14-1:
The interest rates look like this

3.0%
4.0%
4.6%
5.0%
5.2%

so we can calculate that the market expects the one year rates to be:

today: r 0 = 3.0000%
2
in one year: (1.03) (1+r 1) = (1.04) r 1 = 5.0097%
2 3
in two years: (1.04) (1+r 2) = (1.046) r 2 = 5.8104%
3 4
in three years: (1.046) (1+r 3) = (1.05) r 3 = 6.2092%
4 5
in four years: (1.05) (1+r 4) = (1.052) r 4 = 6.0038%

Yield curve for 14-1 Yield curve for 14-2

 O LTHETEN & W ASPI 2012

14-2:
In this question you are given the one year rates and must calculate the various term rates.

one year: 3.0%

2
two year: %(1.03)(1.05) - 1 = 3.995%
3
three year: %(1.03)(1.05)(1.07) - 1 = 4.987%
4
four year: %(1.03)(1.05)(1.07)(1.08) - 1 = 5.733%
5
five year: %(1.03)(1.05)(1.07)(1.08)(1.09) - 1 = 6.378%

14-3: BONDS: enter calculate

SDT = 5 - 15 - 13
A. 5.824% CPN = 3.000
RDT = 2 -15 - 15
Begin with the 3% T-Bond with 21 months to maturity using
RV = 100.00
the dates given in the question.
ACT
Price a $10,000 3% T-Bond to yield 5.8% You can use any 2/Y
principal amount you wish, but make sure that you use a large YLD = 5.79999296
enough principal to give your calculation enough precision. A
PRI = 95.3878
$100 bond will not give you enough decimal places. Calculate
the invoice price as $9,612.54 ($9,538.78 + $73.76) AI = 0.73756906

The invoice price breaks down as follows:

t=0 3 months 9 months 15 21

months months

$150.00 $150.00 $150.00 $10,150.00

$147.84 $143.67 $139.62 $9,181.41

 A NSW ERS TO Q UESTIONS & P ROBLEM S

Value each coupon at the rate appropriate to the term to maturity:

t=0 3 months 9 months 15 21

months months

$150.00 $150.00 $150.00 $10,150.00

$149.21 $145.16 $140.51