need help with financial market home work

You need to use a spreadsheet for this assignment. However the submitted script

**must **be a printed-out paper copy. You must explain how you have derived your

answers; simply submitting a spreadsheet printout of numbers will receive very

little credit. An electronic copy of an Excel file will **not **be accepted.

**Questions: **Answer all questions.

All rates should be calculated to 3 decimal places in % (e.g. 1.234%), the discount factors to

5 decimal places (e.g. 0.98765), and the bond prices to 3 decimal places (e.g. 99.999).

You are given the following yields-to-maturity for semi-annually coupon paying Treasury

Bonds on 31st December 2007 and 31st December 2008:

Term

0.5yr

1yr

2yr

3yr

5yr

7yr

10yr

31 Dec 2007

3.49%

3.34%

3.05%

3.07%

3.45%

3.70%

4.04%

31 Dec 2008

0.27%

0.37%

0.76%

1.00%

1.55%

1.87%

2.25%

(1) Using linear interpolation to estimate any other required rates, find the discount factors

D(t) for t = 0.5, 1.0, 1.5, …, 10.0 for both dates.

(2) From your answers to (1), calculate the price of a constant-maturity 3-year semi-annual

coupon bond1 with an annual coupon rate of 3% and the face value 100, for both 31

December 2007 and 31 December 2008. Hence analyse the price change.

(3) Again from your answers to (1), find the 6-month forward rates f(t,t+½) for t = 0.5, 1.0,

1.5, … , 9.5 for both dates.2 (See Appendix for the explanation for forward rates.)

You are also given the following historical data on the spot 6-month rate:

Date

31/12/07 30/06/08

31/12/08

30/06/09

31/12/09

6m Rate

3.49% 2.17%

0.27%

0.35%

0.20%

30/06/10 31/12/10

30/06/11

30/12/11

29/06/12 31/12/12

0.22% 0.19%

0.10%

0.06%

0.16%

0.11%

(4) Using a graph, comment on how well the market predicted the future moves of the spot

6-month rate on both dates.

(5) In general, are forward rates a good predictor of future interest rates? Briefly discuss.