Question

(1) Par Curve and Interpolation:

- Calculate the 3y, 4y and 7y Treasury Yields using linear interpolation (ensure formulas are in the cells)

PAR Curve
Term	Yield	Bond Px
1	13.00%	$100.000
2	14.00%	$100.000
3
4
5	29.00%	$100.000
7
10	70.00%	$100.000

Answer 1

Formula for the linear interpolation:

The formula is y = y1 + ((x - x1) / (x2 - x1)) * (y2 - y1),

where x is the known value,

y is the unknown value,

x1 and y1 are the coordinates that are below the known x value,

x2 and y2 are the coordinates that are above the x value.

For 3y Treasury yield:

x1 = 2

y1 = 14%

x2 = 5

y2 = 29%

x =3

y= ?

Putting in above formula:

y = 14% + ((3-2) / (5-2)) * (29%-14%) = 19%

For 4y Treasury yield:

x1 = 2

y1 = 14%

x2 = 5

y2 = 29%

x =4

y= ?

Putting in above formula:

y = 14% + ((4-2) / (5-2)) * (29%-14%) = 19%

For 7y Treasury yield:

x1 = 5

y1 = 29%

x2 = 10

y2 = 70%

x =7

y= ?

Putting in above formula:

y = 29% + ((7-5) / (10-5)) * (70%-29%) = 45.40%

Year	Yield
1	13%
2	14%
3	19%
4	24%
5	29%
7	45.4%
10	70%