APPENDIX

(Step 1)
Bond Quotes

Price with
Accrued
Interest

Maturity
Date

Coupon Rate

Ask Price

(%)

x/32

Decimal

2/15/2013
2/15/2013
8/15/2013

4.625%
0.875%
4.375%

101
100
103

22
4
20

0.6875
0.125
0.625

$ 102.41
$ 100.26
$ 104.31

8/15/2013

1.750%

101

0.25

$ 101.52

2/15/2014

3.875%

105

18

0.5625

$ 106.17

2/15/2014

1.375%

101

18

0.5625

$ 101.78

8/15/2014

4.250%

107

16

0.5

$ 108.16

8/15/2014

0.750%

100

17

0.53125

$ 100.65

2/15/2015

4.000%

108

18

0.5625

$ 109.19

2/15/2015
8/15/2015
8/15/2015
2/15/2016
2/15/2016
8/15/2016
8/15/2016
2/15/2017

1.875%
4.250%
0.500%
4.000%
2.375%
4.250%
1.250%
4.500%

103
110
100
111
106
113
102
115

12
21
1
15
9
23
19
13

0.375
0.65625
0.03125
0.46875
0.28125
0.71875
0.59375
0.40625

$ 103.67
$ 111.32
$ 100.11
$ 112.09
$ 106.65
$ 114.38
$ 102.79
$ 116.11

2/15/2017

2.125%

105

0.28125

$ 105.61

Table 1: Adjusted bond price with accrued interest

(Step 2)
Bond Quotes
Coupon Rate
Maturity Date

Construction of Zero Coupon Bond

(%)
8/15/2013

4.375%

$ 104.31

8/15/2013

1.750%

$ 101.52

2/15/2014

3.875%

$ 106.17

2/15/2014

1.375%

$ 101.78

8/15/2014

4.250%

$ 108.16

8/15/2014

0.750%

$ 100.65

2/15/2015

4.000%

$ 109.19

2/15/2015

1.875%

$ 103.67

8/15/2015

4.250%

$ 111.32

8/15/2015

0.500%

$ 100.11

2/15/2016

4.000%

$ 112.09

2/15/2016

2.375%

$ 106.65

8/15/2016

4.250%

$ 114.38

8/15/2016

1.250%

$ 102.79

2/15/2017

4.500%

$ 116.11

2/15/2017

2.125%

$ 105.61

x1

x2

c2/(c2-c1)

-c1/(c2-c1)

-0.666666667

1.666666667

-0.55

1.55

-0.214285714

1.214285714

-0.882352941

1.882352941

-0.133333333

1.133333333

-1.461538462

2.461538462

-0.416666667

1.416666667

-0.894736842

1.894736842

Price

99.67
99.36
99.04
98.80
98.61
98.70
97.96
96.22

Face
Value

Time to
maturity

r(t) of Zero
Coupon Bond

100

0.843836

0.396%

100

1.347945

0.474%

100

1.843836

0.524%

100

2.347945

0.515%

100

2.843836

0.491%

100

3.347945

0.391%

100

3.846575

0.536%

100

4.350685

0.885%

Table 2: The bond portfolios used to construct the zero coupon bonds

Maturity Date

Price of Zero
Coupon bond

Time to maturity

Spot rate

2/15/2013

N/A

0.34795

0.115%

8/15/2013

99.667

0.84384

0.396%

2/15/2014

99.363

1.34795

0.474%

8/15/2014

99.038

1.84384

0.524%

2/15/2015

98.798

2.34795

0.515%

8/15/2015

98.615

2.84384

0.491%

2/15/2016

98.700

3.34795

0.391%

8/15/2016

97.958

3.84658

0.536%

2/15/2017

96.222

4.35068

0.885%

Table 3: Spot rate term structure by construction zero coupon bonds

(Step 4)
Term Structure Coefficients

a0
a1
a2
a3
a4

0.000000000
0.001232542
0.000851534
-0.000479006
0.000075015
Sum of Squared Error

0.85116
Table 4: Coefficients of the polynomial equation

(Step5A and 5B)

Cash Matching
Maturity
02/15/2013
02/15/2013
08/15/2013
08/15/2013

Coupon
0.04625
0.00875
0.04375
0.01750

Dirty Price
$ 102.41
$ 100.26
$ 104.31
$ 101.52

Cash matching w/
reinvestment at zero
rate

Cash matching
with reinvestment
(poly spot rates)

Portfolio
0
74.93298837
0
25.2608202

Portfolio
-8.04912E-15
527.6227461
0
0

02/15/2014
02/15/2014
08/15/2014
08/15/2014
02/15/2015
02/15/2015
08/15/2015
08/15/2015
02/15/2016
02/15/2016
08/15/2016
08/15/2016
02/15/2017
02/15/2017

0.03875
0.01375
0.04250
0.00750
0.04000
0.01875
0.04250
0.00500
0.04000
0.02375
0.04250
0.01250
0.04500
0.02125

$ 106.17
$ 101.78
$ 108.16
$ 100.65
$ 109.19
$ 103.67
$ 111.32
$ 100.11
$ 112.09
$ 106.65
$ 114.38
$ 102.79
$ 116.11
$ 105.61
Total Cost

0
375.4818524
-2.72005E-15
48.06329011
0
778.2435274
0
105.5395605
485.8034094
0
55.5194776
-1.82146E-15
146.6992665
0
222213.6721

-1.01048E-15
0
0
1678.712126
0
0
0
0
0
0
0
0
0
0
221859.9686

Table 5: Portfolios after cash matching with and without reinvestment.

(Step5A and 5B)

Obligation

Relation

02/15/2013
08/15/2013
02/15/2014
08/15/2014
02/15/2015
08/15/2015
02/15/2016
08/15/2016
02/15/2017

10000
5000
40000
7000
80000
12000
50000
6000
15000

<
<
<
<
<
<
<
<
<

CF from
Portfolio (5A)
10000
5000
40000
7000
80000
12000
50000
6000
15000

CF from
Portfolio (5B)
53622.63
44295.79
40000.00
168500.73
161989.47
82282.18
70632.13
20795.00
15000.00

Table 6: constraints for cash matching

Surplus
Simple Cash Matching

Complex Cash Matching

0
0
0
0
0
0
0
7.27596E-12
0

43622.63
39295.79
0.00
161500.73
81989.47
70282.18
20632.13
14795.00

Table 7: Surplus from step 5A and 5B.

(Step 6)
Maturity

Coupon

02/15/2013

4.63%

Dirty Price
$

102.41

Portfolio
33.63571269

02/15/2013
08/15/2013
08/15/2013
02/15/2014
02/15/2014
08/15/2014
08/15/2014
02/15/2015
02/15/2015
08/15/2015
08/15/2015
02/15/2016
02/15/2016
08/15/2016
08/15/2016
02/15/2017
02/15/2017

0.88%
4.38%
1.75%
3.88%
1.38%
4.25%
0.75%
4.00%
1.88%
4.25%
0.50%
4.00%
2.38%
4.25%
1.25%
4.50%
2.13%

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

100.26
104.31
101.52
106.17
101.78
108.16
100.65
109.19
103.67
111.32
100.11
112.09
106.65
114.38
102.79
116.11
105.61
Objective

0
141.8226805
0
0
0
640.7508499
0
0
-2.6923E-15
839.6255074
1.16226E-15
0
2.40086E-15
246.0744153
1.36176E-15
114.5594361
0
2016.468602

Table 8: Portfolio of bonds with Immunization.

Constraint

Portfolio

Obligation

PV

222430.784

222430.7843

dPV/da0

544058.343

544058.3429

dPV/da1

1544633.55

1544633.546

dPV/da2

4809782.56

4809782.555

dPV/da3

16026704.5

16026704.45

dPV/da4

56287004.9

56287004.93

Table 9: Constraints of Immunization Portfolio.

Results Table
Maturity

Coupon

02/15/2013
02/15/2013
08/15/2013
08/15/2013
02/15/2014
02/15/2014
08/15/2014
08/15/2014
02/15/2015
02/15/2015
08/15/2015
08/15/2015
02/15/2016

4.63%
0.88%
4.38%
1.75%
3.88%
1.38%
4.25%
0.75%
4.00%
1.88%
4.25%
0.50%
4.00%

Dirty Price
$
$
$
$
$
$
$
$
$
$
$
$
$

102.41
100.26
104.31
101.52
106.17
101.78
108.16
100.65
109.19
103.67
111.32
100.11
112.09

a0

a0-a1

a0-a2

a0-a3

a0-a4

Portfolio

Portfolio

Portfolio

Portfolio

Portfolio

0
0
0
-1.388E-15
-2.671E-15
0
574.524624
0
1.1914E-14
-2.649E-15
1439.13827
1.104E-14
5.454E-15

0
0
402.324
0
-1.2E-15
0
0
0
0
0
1470.735
0
-4.5E-15

0
0
421.6869
0
0
0
-5.7E-14
0
0
0
1426.642
0
-2.9E-15

0
0
0
0
-5.1E-15
0
987.3642
0
0
0
758.0963
1.39E-15
0

0
0
0
0
0
0
952.6191
0
-1.8E-15
1.2E-15
815.4136
0
1.35E-14

02/15/2016
08/15/2016
08/15/2016
02/15/2017
02/15/2017

2.38%
4.25%
1.25%
4.50%
2.13%

$ 106.65
$ 114.38
$ 102.79
$ 116.11
$ 105.61
Objective

0
1.7104E-15
0
0
1.9117E-15
2013.6629

-1E-15
-4.1E-14
-1.9E-15
142.3177
-1E-06
2015.377

0
0
-7.4E-15
167.2456
-1E-06
2015.574

0
0
9.84E-15
269.9221
-1E-06
2015.383

Table 10: Portfolios for different cases of changes in interest rate parameters.

a0

a0-a1

a0-a2

a0-a3

a0-a4

PV

222430.784

222430.8

222430.8

222430.8

222430.8

dPV/da0

544058.343

544058.3

544058.3

544058.3

544058.3

dPV/da1

1544634

dPV/da2

4809783

dPV/da3

dPV/da4

16026704
56287005

Table 11: Constraints for changes in interest rates.

0
-1.5E-15
-6.5E-15
247.2051
0
2015.238