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Treasury zero rates

 

  • In the case of treasury rates there are some key facts to know:
    • Treasury bills are issued at a discount from face value and are paid at their par (face amount) at maturity.
    • The purchase price is expressed as a price per hundred dollars
    • Bills are sold at a discount. The discount rate is determined at auction
    • Bills pay interest only at maturity. The interest is equal to the face value minus the purchase price
    • Bills are sold in increments of $100. The minimum purchase is $100
  • Boot Strap Method to determine zero rates
    • Consider the bond prices of Treasury bonds given below in column 4. Calculate the continuously compounded zero rates for 6 months, 12 months, 18 months and 24months

Bond Principal

Time to Maturity

Annual Coupon

Bond Price

Continuously Compounded 0-rate

100

0.5

10

99.5

10.76

100

1.0

10

98.4

11.43

100

1.5

10

96.5

12.31

100

2.0

10

94.3

13.01

 





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