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.
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1 comment:
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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