Running head: Week 3 – Assignment – Bootstrapping Chapter 10 Problem 31

Week 3 – Assignment – Bootstrapping Chapter 10 Problem 31

BUS405: Principles of Investments

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Running head: Week 3 â&#x20AC;&#x201C; Assignment â&#x20AC;&#x201C; Bootstrapping Chapter 10 Problem 31

Complete problem 31 of Chapter 10 (shown below), and submit to your instructor. Show your calculations and the algebraic manipulation of the price equation for the bond. In addition to solving the problem, write a 100 to 200 word essay on the term structure of fixed income securities. One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To bootstrap the two-year rate, you can set up the following equation for the price (P) of the coupon bond: P=C_1/(1+r_1 )+(C_2+Par value)/ (1+r_2 )^2

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Bus 405 week 3 assignment bootstrapping chapter 10 problem 31