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    L03 Interest Rates Yield Curve CLASS

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    12640albanjaswant

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    © All Rights Reserved
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    L03 Interest Rates Yield Curve CLASS

    Uploaded by

    12640albanjaswant
    9 views13 pages

    Copyright

    © © All Rights Reserved

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    XLSX, PDF, TXT or read online from Scribd

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    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    9 views13 pages

    L03 Interest Rates Yield Curve CLASS

    Uploaded by

    12640albanjaswant

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 13

    FV 1000 Time Coupon Face Value Cash Flow

    CR 5% 1 50 0 50
    YTM 4.47% 2 50 0 50
    3 50 0 50
    4 50 0 50
    5 50 1000 1050
    Price at 0:
    DCF
    47.86
    45.81
    43.85
    41.98
    843.78
    1023.29
    Coupon (y) 10%
    i
    Price 889.2
    FV 1000

    Time Coupon D Coupon

    889.20=100/(1+𝑖)^1 +100/(1+𝑖)^2 +100/(1+𝑖)^


    1 100 100.000

    +100/(1+𝑖)^6 +100/(1+𝑖)^7 +((1000+100))/(1+


    2 100 100.000
    3 100 100.000
    4 100 100.000
    5 100 100.000
    6 100 100.000
    7 100 100.000
    8 1100 1100.000
    Present value of CF = 1800.000
    +100/(1+𝑖)^2 +100/(1+𝑖)^3 +100/(1+𝑖)^4 +100/(1+𝑖)^5
    1+𝑖)^7 +((1000+100))/(1+𝑖)^8
    FV 100 Price YTM Price YTM
    CR 10% 120 7.13% -120.00 € 7.13%
    ABOVE PAR
    T 10 110 8.48% -110.00 € 8.48%
    100 10.00% PAR -100.00 € 10.00%
    Settlement date 1/1/2009 90 11.75% -90.00 € 11.75%
    BELOW PAR
    Maturity date 1/1/2019 80 13.81% -80.00 € 13.81%

    From prices to yields OR From yields to prices


    Growth in Quantity
    Rate of Nominal
    Year CPI inflation income nominal of goods
    income bought

    0 100 € 20,000 200

    1 110 10.00% € 24,000 20.00% 218.18

    CPI Index (France) https://www.insee.fr/en/metadonnees/source/indicateur/p1653/description


    https://www.insee.fr/en/statistiques/serie/001759970
    Real rate of growth of
    income (= real FISHER EQUATION

    1+𝑟_𝑟𝑒𝑎𝑙=
    interest rate)

    (1+𝑟_𝑛𝑜𝑚𝑖𝑛𝑎𝑙)/(1+𝑖𝑛𝑓𝑙
    9.09%
    𝑎𝑡𝑖𝑜𝑛)

    9.09%
    ur/p1653/description
    APPROXIMATION

    𝑟_𝑟𝑒𝑎𝑙≈𝑟_𝑛𝑜𝑚𝑖𝑛𝑎𝑙−𝑖𝑛𝑓
    𝑙𝑎𝑡𝑖𝑜𝑛

    10.00%
    Original Face Initial Current Initial Price New YTM
    Coupon ($) Initial YTM
    maturity Value ($) Yield (%) (EUR) in t+1
    30 1000 100 10% 10% 1,000.00 € 20%
    20 1000 100 10% 10% 1,000.00 € 20%
    10 1000 100 10% 10% 1,000.00 € 20%
    5 1000 100 10% 10% 1,000.00 € 20%
    2 1000 100 10% 10% 1,000.00 € 20%
    1 1000 100 10% 10% 1,000.00 € 20%

    Coupon rate 10%


    Price Next Rate of Capital Rate of
    Year ($) Gain (%) Return (%)
    503 € -49.7% -39.7%
    516 € -48.4% -38.4%
    597 € -40.3% -30.3%
    741 € -25.9% -15.9%
    917 € -8.3% 1.7%
    1,000 € 0.0% 10.0%
    FV: 100 Year CF Bond 1 CF Bond 2 DCF Bond 1 DCF Bond 2
    Coupon Bond 1 5% 1 5 10 4.78 9.57
    Coupon Bond 2 10% 2 5 10 4.58 9.16
    3 5 10 4.38 8.76
    4 5 10 4.19 8.39
    5 105 110 84.26 88.27
    [email protected]%: 102.19 124.14
    4.50%

    Year CF Bond 1 CF Bond 2 DCF Bond 1 DCF Bond 2


    1 5 10 4.74 9.48
    2 5 10 4.49 8.98
    3 5 10 4.26 8.52
    4 5 10 4.04 8.07
    5 105 110 80.34 84.16
    [email protected]%: 97.86 119.22
    5.50%
    Period Bond 1 Bond 2
    1 0.047 0.077
    2 0.090 0.148
    3 0.129 0.212
    4 0.164 0.270 3. Bond 1 has higher duration; hence, it is riskier
    5 4.122 3.555 than bond 2 (i.e., more sensitive to required yield
    Duration 4.552 4.262 changes).

    Actual Approx with


    change duration
    % change in Bond 1 -4.24% -4.36% 1. Despite the two bonds have the same maturity, we find tha
    % change in Bond 2 -3.97% -4.08% bond 1 lost by more than bond 2
    2. Why is bond 1 “riskier” than bond 2? Because bond price ri
    (volatility) is proportionally related to the duration.
    ve the same maturity, we find that
    nd 2
    an bond 2? Because bond price risk
    elated to the duration.

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