T3. Mkt Prdts (Global T3 Topic Drill)

[skoh]

Hi folks,

For question 203.1 and 203.2, I noticed we are taking (100÷ the longer year bond PV) to get the zero rate. Example for 203.1, it is 100÷96.58 . Why shouldn't we use the PV of the 3yr Treasury Bond divided by the PV of 5yr Treasury Bond?

 

[David Harper CFA FRM]

Hi skoh,

It's helpful if you attach these to the source below @ http://forum.bionicturtle.com/threads/p1-t3-203-hulls-interest-rates-ii.6010/

In regard to the question:

203.1. The 3-year US Treasury zero rate is 0.40%. A 5-year US Treasury P-STRIP is priced at $96.58. Assume annual compounding. Which is nearest to the implied two-year forward rate from year 3 to year five, F(3,5)?

You can also solve it with prices, as you suggest:

1. 3-year price = 100/(1+0.40%)^3 = $98.80954,
2. F[3,5] = ($98.80954/$96.8)^(1/2) - 1 = 1.148%

 

[skoh]

Thank you David!