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( a ) Given the following information about the default - free, coupon paying yield curve, with face value of 1 0 0 0 ,
a Given the following information about the defaultfree, coupon paying yield curve,
with face value of derive the zerocoupon yield curve for years through
using discrete compounding. Coupons are paid annually at the end of the year.
Solution The candidate should apply the bootstrap methodology:
and similarly and
b You have at the beginning of year Using the information from the
table above, and assume that all the bonds are selling at par ignore the column
of YTM for this part what transaction should you undertake today to lock in the
forward rate from year to year using the coupon paying bonds provided above?
What is the forward rate?
Solution Solving the following system of equations:
yields The payoff in year is given by
implying a forward rate from period to of I do not understand how to slove question b in the solution Could youpl ease explain to me in detailed how does it works Thanks
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