Question

Estimate term structure of discount factors, spot rates and forward rates by using data on five semi-annual coupon paying bonds with $100 face value each: The bonds, respectively, have 1.25, 5.35, 10.4, 15.15 and 20.2 years to maturity; pay coupon at annual rates of 4.35, 5.25, 6.25, 7.25, and 8.25 percent of face value; and are trading at quoted spot market prices in dollars of 98.25, 99.25, 100.25, 101.25 and 102.25 . Specify the discount factor function d(t) by a third degree polynomial with unknown parameters a, b, and c . Using estimated d(t) function, determine spot rate and forward rate functions by assuming half-year compounding. Then write the values of the following based on your estimation.

11.Coefficient of parameter a in third bond price equation.

12.Coefficient of parameter b in third bond price equation.

13.Coefficient of parameter c in third bond price equation.

14.Coefficient of parameter a in fourth bond price equation.

15.Coefficient of parameter b in fourth bond price equation.

16.Coefficient of parameter c in fourth bond price equation.

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Answer 1