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.
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.
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