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Spot Forward Problems PDF

The document presents two examples of calculating spot rates and implied forward rates from yield curves. For each yield curve, it shows the calculations to derive the spot rate curve and then uses the spot rates to calculate the implied 6-month forward rates between each maturity date. It verifies the consistency of the forward rates by checking that compounding them over 2 years equals the 2-year spot rate.

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85 views3 pages

Spot Forward Problems PDF

The document presents two examples of calculating spot rates and implied forward rates from yield curves. For each yield curve, it shows the calculations to derive the spot rate curve and then uses the spot rates to calculate the implied 6-month forward rates between each maturity date. It verifies the consistency of the forward rates by checking that compounding them over 2 years equals the 2-year spot rate.

Uploaded by

Scotty030793
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Theoretical spot rate and forward rate problem

FIN378, Fixed Income Analysis


Created by Pamela Peterson Drake, James Madison University

1. Given the following par yield curve, calculate the spot rate curve and the implied 6-month forward
rate corresponding to each maturity’s spot rate:

Coupon Bond Par 6-month


Maturity rate value yield Spot rate forward rate
6-months 0% 99.01 2%
1 year 0% 97.55 2.5%
1.5 years 3% 100 3%
2 years 3.5% 100 3.5%

2. Given the following par yield curve, calculate the spot rate curve and the implied 6-month forward
rate corresponding to each maturity’s spot rate:

Coupon Bond Par 6-month


Maturity rate value yield Spot rate forward rate
6-months 0% 99 2.02%
1 year 0% 98 2.0305%
1.5 years 2.2% 100 2.2%
2 years 2.4% 100 2.4%
Solutions

1.

Coupon Bond Par 6-month


Maturity rate value yield Spot rate forward rate
6-months 0% 99.01 2% 2%
1 year 0% 97.55 2.5% 2.5% 3.00124%
1.5 years 3% 100 3% 3.0101% 4.03747%
2 years 3.5% 100 3.5% 3.52228% 5.06894%

Using information for the 1.5 year security:


100 = 1.5/(1+0.01) + 1.5/(1+0.0125)2 + 101.5/ (1 + z)3
100 = 1.48515 + 1.46319 + 101.50/ (1 + z)3
97.05166 = 101.5/ (1 + z)3
z = 1.50506% spot rate = 3.0101%
Using information for the 2-year security:
100 = 1.75/(1+0.01) + 1.75/(1+0.0125)2 + 1.75/ (1 + 0.0150506)3 + 101.75 / (1+z)4
100 = 1.732673 + 1.707057 + 1.673304 + 101.75/ (1 + z)4
96.63697 = 101.75/ (1 + z)4
z = 1.76114% spot rate = 3.52228%
6-month forward rate implied by 6-month and 1-year rates:
[(1.0125)2 / (1.01)] - 1 = 1.5006% forward rate = 3.00124%
6-month forward rate implied by 1-year and 1.5 year rates:
[(1.0150506)3 / (1.0125)2] - 1 = 2.018737% forward rate = 4.03747%
6-month forward rate implied by 1.5-year and 2-year rates:
[(1.0176114)4 / (1.0150506)3] – 1 = 0.0253447 forward rate = 5.06894%
Check on forward rates: The string of 6-month rates for 2 years must be equivalent to the 2-year
rate
[(1.01) × (1.015006) × ( 1.02018737) × (1.0233447) ]1/4 – 1 = 1.0171218%
Annualize, 1.017128% x 2 = 3.52228%, which is the 2-year rate
2.
Coupon Bond Par 6-month
3. Maturity rate value yield Spot rate forward rate
6-months 0% 99 2.02% 2.02%
1 year 0% 98 2.031% 2.0305% 2.041%
1.5 years 2.2% 100 2.2% 2.2019% 2.545%
2 years 2.4% 100 2.4% 2.4052% 3.016%

Using information for the 1.5 year security:

100 = 1.1/(1+0.0101) + 1.1/(1+0.0101525)2 + 101.1/ (1 + z)3

100 = 1.088893 + 1.0751192 + 101.1/ (1 + z)3

97.85402 = 101.1/ (1 + z)3

z = 1.101% spot rate = 2.2019%

Using information for the 2-year security:

100 = 1.2/(1+0.0101) + 1.2/(1+0.0101525)2 + 1.2/ (1 + 0.01101)3 + 101.2 / (1+z)4

100 = 1.188001 + 1.1760013 + 1.161221 + 101.2/ (1 + z)4

96.47478 = 101.2/ (1 + z)4

z = 1.2026% spot rate = 2.4052%

6-month forward rate implied by 6-month and 1-year rates:

[(1.0101525)2 / (1.0101)] - 1 = 1.0205% forward rate = 2.041%

6-month forward rate implied by 1-year and 1.5 year rates:

[(1.01101)3 / (1.0101525)2] - 1 = 1.27272% forward rate = 2.545%

6-month forward rate implied by 1.5-year and 2-year rates:

[(1.012026)4 / (1.01101)3] – 1 = 1.50801% forward rate = 3.016%

Check on forward rates: The string of 6-month rates for 2 years must be equivalent to the 2-year
rate

[(1.0101) × (1.010205) × ( 1.0127272) × (1.0150801) ]1/4 – 1 = 1.2026%

Annualize, 1.012026% x 2 = 2.4052%, which is the 2-year rate

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