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- Topic: Current Spot Rate calculation

Author | Topic: Current Spot Rate calculation |
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littleangel@2007-10-27 15:44:12 |
Hi everyone! I just got in trouble on the "Current spot rate". Could anybody help? Thanks a lot! Here's the question. The 6-month T-bill yields 6%. The 1-year Treasury yields 6.5%. If a Treasury note with a maturity of 1.5 years and a coupon rate of 8% is currently priced to yield 9%, what's the current spot rate for 1.5 year maturity? (a) 9.11% (b) 6.5% (c) 6% (d) 7% |

achu@2007-11-16 02:13:04 |
I think the answer is a) 9.11%. Not 100% sure but here it goes: The key is you have 3 cash flows given in the last sentence: PV0, $4 (8% coupon at 6 months), $4 (coupon at 12 months), $104 at 18 months ($4 + 100 principal). I used $100 bond, but $1000 bond math is same idea. Using the PV on calcluator with n=3, PMT=4, FV=100, i= 9/2 = 4.5, PV = 98.63. Now set PV = CF1/(1+s) + CF2/(1+s)^2 + CF3/(1+s)^3. 98.63 = 4/1.03 + 4/1.0325^2 + 104/(1+s^3) You get 1.14298 = (1+s)^3 ; hard to solve but by pluggingin you can see that (1+ .0911/2)^3 = about 1.14297. |

achu@2007-11-16 02:16:35 |
Warning: am not 100% sure. My choice:a)9.11 Solve last sentence for PV of the bond = 98.63 (n3, i=4.5, PMT=4, FV =100) Then, 98.63 = 4/(1.03) + 4/(1.0325)^2 + 104/(1+s3)^3 You get 1.14298 = (1+s3)^3 Solve for s3 (semiannual % that is). Using 9.11/2 , the answer works out, I think. |

GeorgeC@2007-11-20 16:03:36 |
I've just gone through this and come up with same answer. Having just done all the maths though I've just noticed all the YTMs and the spot rates are rising - hence the spot rate at this maturity (1.5 years) must be above the YTM - the only value from the list that is above the YTM is 9.11% so that's a much easier way to answer the question!!! I'm so gonna do the same thing in the exam lol!!! |