Problem 7: Bootstrapping The Yield Curve [10 points Based on the U.S. Treasury b
ID: 2796348 • Letter: P
Question
Problem 7: Bootstrapping The Yield Curve [10 points Based on the U.S. Treasury bond information below, answer the following series of question:s Coupon Rate 3% 4% 3% 0% Maturity (years) 0.5 Bond Price 100.000 100.500 98.750 92.000 4 2.0 A. [8 points (2 per spot rate)] From the given information, compute the 6-month, 1-year, 1.5-year, and 2-year spot rates. Do not round excessively: use at least 5 decimal places(for example 12.345%) B. [1 points] Is the term structure inverted, normal, or flat? C. points] Use the liquidity preference theory to explain the shape of the term structure (your answer to B)Explanation / Answer
A. The spot rates are computed using excel function =RATE(nper,pmt,pv,fv) .
For example for 6 month, spot rate =RATE(0.5*2,3/2,-100,100) *2 = 3.00%
The table shows the spot rates rounded to five decimals
B The term structure is seen increasing the in long term and hence its normal neither inverted (meaning reducing spot rates) nor flat.
C. the interest rates are seen increasing in the long term. So long term interest rates atre higher meaning the US Feferal reserve is expected to increase the rates in the coming days.
Bond Coupon rate Maturity Price Spot rate 1 3% 0.5 100 3.00000% 2 4% 1 100.5 3.48689% 3 3% 1.5 98.75 3.86575% 4 0% 2 92 4.21284%