Asignment Question: Calculating Sopt rate and Forward rates

Questions
Suppose that you observe the following yields to maturity for the current coupon yield curve. All
bonds are selling at their $1,000 par value.
Maturity
(in years)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1.
2.

3.
4.
5.

Yield to Maturity
5.00%
5.10%
5.20%
5.35%
5.45%
5.55%
5.67%
5.77%
5.78%
5.90%
6.00%
6.11%
6.22%
6.33%
6.44%
6.55%
6.66%
6.77%
6.88%
6.99%

Using the accompanying spreadsheet, calculate the spot rates implied by the current
coupon yield curve.
Compute the present value of a 20-year, 7.5% coupon bond if you were to incorrectly use
the Yield to Maturity for the 20-year Par Value Bond as the discount rate. Compare this
result to the price computed using the individual spot rates to discount the bonds cash
flows.
What are the forward rates for one-year securities implied by the spot rates?
According to the expectations theory, what rate would the market expect on a four-year
zero coupon bond two years from now?
According to the expectations theory, what rate would the market expect on a ten-year
zero coupon bond one year from now?

ld curve. All

current

correctly use
ompare this
onds cash

a four-year

a ten-year

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A
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84

Period
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

B
C
D
Forward Rate Calculations
Spot
Rates
5.0000%
5.1026%
5.2070%
5.3680%
5.4763%
5.5874%
5.7256%
5.8428%
5.8475%
6.0007%
6.1307%
6.2803%
6.4358%
6.5983%
6.7687%
6.9484%
7.1388%
7.3418%
7.5596%
7.7950%

Forward Rates
1-year
2-year
3-year
4-year
5-year
6-year
7-year
5.2052% 5.3107% 5.4909% 5.5957% 5.7053% 5.8470% 5.9637%
5.4163% 5.6341% 5.7261% 5.8307% 5.9759% 6.0907% 6.0614%
5.8522% 5.8814% 5.9692% 6.1162% 6.2261% 6.1693% 6.3426%
5.9105% 6.0277% 6.2044% 6.3198% 6.2328% 6.4246% 6.5691%
6.1450% 6.3516% 6.4565% 6.3135% 6.5277% 6.6792% 6.8583%
6.5587% 6.6126% 6.3697% 6.6235% 6.7864% 6.9776% 7.1684%
6.6666% 6.2753% 6.6452% 6.8434% 7.0616% 7.2704% 7.4781%
5.8855% 6.6345% 6.9024% 7.1606% 7.3915% 7.6140% 7.8369%
7.3887% 7.4145% 7.5890% 7.7714% 7.9631% 8.1656% 8.3807%
7.4404% 7.6893% 7.8992% 8.1071% 8.3217% 8.5469% 8.7861%
7.9389% 8.1294% 8.3303% 8.5431% 8.7696% 9.0120% 9.2729%
8.3202% 8.5265% 8.7453% 8.9783% 9.2279% 9.4968% 9.7886%
8.7333% 8.9584% 9.1985% 9.4560% 9.7337% 10.0353% 10.3655%
9.1841% 9.4319% 9.6979% 9.9852% 10.2975% 10.6399%
9.6804% 9.9558% 10.2535% 10.5777% 10.9334%
10.2319% 10.5412% 10.8784% 11.2489%
10.8514% 11.2031% 11.5899%
11.5558% 11.9610%
12.3677%

8-year
5.9540%
6.2264%
6.4792%
6.7394%
7.0399%
7.3628%
7.6899%
8.0656%
8.6104%
9.0421%
9.5557%
10.1077%

9-year
6.1124%
6.3606%
6.6404%
6.9139%
7.2268%
7.5636%
7.9093%
8.3042%
8.8572%
9.3186%
9.8646%

Page 3

10-year
6.2445%
6.5174%
6.8072%
7.0944%
7.4209%
7.7735%
8.1393%
8.5563%
9.1241%
9.6197%

11-year
6.3974%
6.6800%
6.9809%
7.2827%
7.6244%
7.9947%
8.3831%
8.8256%
9.4150%

12-year
6.5563%
6.8496%
7.1628%
7.4805%
7.8393%
8.2299%
8.6440%
9.1165%

13-year
6.7222%
7.0274%
7.3544%
7.6897%
8.0681%
8.4822%
8.9260%

14-year
6.8962%
7.2148%
7.5574%
7.9125%
8.3135%
8.7552%

15-year
7.0796%
7.4133%
7.7739%
8.1517%
8.5792%

16-year
7.2740%
7.6250%
8.0065%
8.4105%

17-year
7.4812%
7.8524%
8.2583%

18-year
7.7036%
8.0984%

19-year
7.9442%