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Yield Curves for Different Risk Classes Risk Premiums (Yield Spreads)

 
 

 

Example

Discuss the yield curve below and the economic impacts it conveys:
 

What is the 1.5 year par yield of a $100 bond when the zero rates (Continuous Compounded) on 6months, 12 months and 18 months are 4%, 4.5% and 5%?
 

Solution

Let it be C
        100 = C*e-0.5*.04 + C*e-1*.045 + (100 + C)*e-1.5*.05
        100 = C*(0.9801987 + 0.955997 + 0.927743) + 92.7743
        C = 7.225651/2.863939
        C = 2.523
        Coupon = 2.523*2 = 5.05%
 

 

 





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