office (412)
967-93673.5 Online Pricing Relative to the Yield Curve
In this topic, we will work through the exercise developed in topic 3.4, Pricing Relative to the Yield Curve. You will work with the interactive calculator below:
The default values are Face Value = 100, Years to Maturity = 10, Coupon Payment Frequency = 2 and Coupon Rate = 5%. The yield curve is plotted on the right hand side of the above screen. For this example, this is linear and upward sloping as depicted.
In the example provided in Topic 3.4, the spot interest rates are 4%, 6.96%, and 9.89%, for Years 1-3, respectively. If the display does not already show this data, click on "Textbook Data." You can also change spot rates by double-clicking on the rate and typing directly into each yield cell above.
Now you are ready to solve the value for each bond.
Interactive Example 1: For a one year zero-coupon bond enter Face Value = 100, Years to Maturity = 1 and Coupon Frequency = 1 and Coupon Rate = 0. Click OK to verify the value from the yield curve used in Topic 3.4. The Present Value is 96.154.
Interactive Example 2: For a two year zero-coupon bond change the Years to Maturity to equal 2 and click OK. The Present Value is 87.409.
Interactive Example 3: For a coupon bond enter Face Value = 100, Years to Maturity = 3 and Coupon Frequency = 1 and Coupon Rate = 10. Click OK to verify the value from the current 3-year yield curve. The Present Value is $101.249.
By clicking on the numeric button you will see the present value of each cash flow component (Year 1 coupon payment, Year 2 coupon payment, and Year 3 face amount plus coupon payment):
