Tuesday, December 30

Bootstrapping Spot Rate

Bootstrapping is the process of calculating spot rates from coupon bond yields.

Example:
Given a 2-year bond price (P) with annual coupon (C) and 1-year spot rate Z1,
You can calculate 2-year spot rate in the following formula:


P = C/(1+Z1) + (C+PAR)/ (1+Z2)2

Given Z1,Z2 and the price of a 3-year bond, you can calculate Z3 in the same manner.

1 comment:

Muskie said...

It appears the coupon is calculated with the YTM for year 2, not the coupon rate. This is based on other examples I have seen.