Question

The nation of Meltoria uses the same bond pricing conventions as the US, except that in Meltoria, all half-years have the same number of days and bond transactions are settled on the trade date. Each of the following four Meltorian government bonds has just made a half-yearly coupon payment.

Bond	Term (months)	Coupon rate pa	Yield pa
A	6	12%	6.010%
B	12	9%	6.674%
C	18	6%	7.056%
D	24	2%	7.260%

Use the bootstrap method to estimate zero rates for terms of 6, 12, 18 and 24 months. Show your calculations.

Answer 1

Answer:-

We will use the abbrevation of Z for yields,

Here is the table for conventions

Spot/ zero rates for	Abbrevation
6 months	Z0
12 months	Z1
18 months	Z3
24 months	Z3

For term strcuture, with bootstrapping method,

Z₀ = 6.01 / 2 = 3.005 %

Considering 100 as par price of the bond,

Bootstrapping equation, for bond B

Hence,

Z₁ = 4.53%

Bootstrapping equation, for bond C

Hence,

Z₂ = 2.97%

Bootstrapping equation, for bond D

Hence,

Z₃ = 0.9639%