ECOM074 Bond Market Strategies

Tutorial Class 3

Question topics

1.   Calculating implied spot rates using zero-coupon bond prices.

2.   Using the bootstrapping method to derive spot rates.

3.   Calculating bond prices using spot rates.

4.   Calculating one-year forward rates using spot rates.

5.   Calculating bond prices using spot rate and forward rate.

6.   Calculating bond prices using spot rate and forward rate forecast .

7.   Calculating the one-year investment return for a bond using two spot rate curves.

Reference material

1.   Lecture 4 Yield curve analysis: part 5.

2.   Lecture 4 Yield curve analysis: part 6.

3.   Lecture 4 Yield curve analysis: part 8.

4.   Lecture 4 Yield curve analysis: part 10.

Question 1

Consider a 5-year zero-coupon Euro area government bond with a par value of €100. This bond is priced at €88.3854. Calculate the implied spot rate for this bond. Assume an annual coupon payment frequency for your calculation.

Question 2

The following table contains information for two Euro area government par bonds. Use the bootstrapping method and the information in the table to derive the one-year and two-year spot rates.

Table. Two annual coupon payment par bonds.

Calculate the price of the two-year par bond using the spot rates that you have derived.

Question 3

Consider a 5-year Euro area government par bond with a par value of €100. The par yield for  this bond is 2.49% and this bond has an annual coupon payment frequency. Calculate the price for this bond using the spot rates in the following table.

Table. Spot rate curve for Euro area government bonds .

Question 4

Use the spot rates in the following table to calculate the one-year forward rate.

Table. Spot rate curve for Euro area government bonds .

Question 5

Consider a 2-year Euro area government par bond with a par value of €100. The par yield for   this bond is 2.7525% and this bond has an annual coupon payment frequency. Calculate the       price for this bond using the one-year spot rate in question 4 and your answer for the one-year forward rate in question 4.

Question 6

Consider the same 2-year bond in question 5. Calculate the price for this bond using a forecast for the one-year forward rate that is 100 basis points higher than your answer in question 4 .