Read First* - Please take your time!! The answers to the first questions are: Period 3 - 2.503412, Period 4 - 4.8904, Period 5 - 2.7068, Period 6 - 3.1053
Please show the work to getting these answers for question 1 as they are needed for answering question 2. For the first question you need to use a present value formula for compounding once a year rather than continous compunding.
The second question you need to use the forward rate formula
Assume the following par yields for the on-the-run Treasury yield curve.
Date Period Years Par Yield = coupon rate
2/15/2014 1 0.5 2.10% (BEY of 6-month T-bill)
8/15/2014 2 1.0 2.30% (BEY of 1-year T-bill)
2/15/2015 3 1.5 2.50%
8/15/2015 4 2.0 2.70%
2/15/2016 5 2.5 3.00%
8/15/2016 6 3.0 3.40%
1. Calculate the spot rate curve from the par yield curve using bootstrapping. Show all calculations and include six decimal places.
2. Calculate the 1-year (2-period) forward rate 1 year (2 periods) from today and the 1-year (2-period) forward rate two years (4 periods) from today. Use the spot rate curve you calculated in problem 1. above. Show all calculations and include six decimal places.