Question 1

1.50%
a 3% coupon bond, payment schedule
Year rn δ Zeros 0.5 maturity 1 maturity 1.5 maturity 2 maturity
0.5 1.45% 0.992802 99.280218416 101.5 1.5 1.5 1.5
1 1.70% 0.983214 98.321431934 101.5 1.5 1.5
1.5 1.79% 0.973624 97.362354088 101.5 1.5
2 1.98% 0.961361 96.136102498 101.5

Price of Bo 101.75
Number 0 0.5 1 1.5 2
Long the 3% coupon 197938.2 -20140211.33 296907.2923 296907.292 296907.2923 20090727

Short 0.5 maturity ZC 2969.073 294770.20832 -296907.292

Short 1 maturity ZCP 2969.073 291923.50133 0 -296907.29
Short 1.5 maturity ZC 2969.073 289075.92927 0 0 -296907.292
Short 2 maturity ZCP 200907.3 19314441.691 0 0 0 -20090727

Arbitrage 50000 5.82077E-11 5.8208E-11 5.82077E-11 0

Amount Required 50000 1

Number of Transactions 197,938.19 Obtained by dividing $50,000 by the arbitrage profit from each tran

d To get the yield of the bond, we set up its cash flows

Coupon 3%
Yield 2.102%
Price 101.75 <-- use Solver to set this equal to the target price of 101.75

Time Cashflow PV
0.5 1.5 1.4844
1 1.5 1.4690
1.5 1.5 1.4537
2 101.5 97.3430
 3% coupon bond, Discounted coupons
0.5 maturit2 maturity 1.5 maturit3 maturity
100.7694 1.489203 1.489203 1.489203
0 99.79625 1.474821 1.474821
0 0 98.82279 1.460435
0 0 0 97.57814
100.7694 101.2855 101.7868 102.0026

rage profit from each transaction.

 Annual payment 25.901
Disc. Rate 2.0%

NPV Calculation Loan Replication with Savings Account

Present Interest
Time Cashflow Value Time Earned Cash
0 (200.000) (200.000) 0 232.658 <-- Type successive guesses in here u
1 25.901 25.393 1 4.65 211.410 and the end of year 10 is zero. Al
2 25.901 24.895 2 4.23 189.737 entry in this cell to make the entr
3 25.901 24.407 3 3.79 167.631
4 25.901 23.929 4 3.35 145.083
5 25.901 23.459 5 2.90 122.083
a. The total dollar amount tha
6 25.901 22.999 6 2.44 98.624 b. The PV of the amounts to b
7 25.901 22.548 7 1.97 74.695 c. The NPV of paying back the
8 25.901 22.106 8 1.49 50.288 d. The NPV of the project wou
equal to the rate at which the
9 25.901 21.673 9 1.01 25.393 this by typing 5% for the disco
10 25.901 21.248 10 0.51 (0.000) e. The money you would need
is exactly equal to the PV of al
This calculation is shown in th
Total 259.010 232.658 f. The a reason that the NPV o
32.658 <-- NPV to make good on all the loan's
from part (e). But if you can p
future payments for only 200k
 ccessive guesses in here until the remaining dollar amount
e end of year 10 is zero. Alternatively, use solver to change the
n this cell to make the entry in cell H17 equal to zero.

he total dollar amount that needs to be paid back is 259.01k.

he PV of the amounts to be paid back is 232.658k.
he NPV of paying back the loan is 32.658k.
he NPV of the project would be zero is the discount rate was 5%, which is
al to the rate at which the loan payments were calculated. You can check
by typing 5% for the discount rate in the Disc. Rate cell.
he money you would need to put aside in a savings account that grows at 2%
xactly equal to the PV of all the payments, when you discount them at 2%.
calculation is shown in the table to the right.
he a reason that the NPV of paying off the student loan is 32.658k is because
make good on all the loan's payment you would need to put aside 232.658
m part (e). But if you can pay back the entire loan now and not make any
ure payments for only 200k, this makes you 32.658 better off.
 𝑟_𝑛=2×[(1/𝛿_𝑛 )^(1/2𝑛)−1]
Disc
(a) Maturity Zero price factor Spot rate
0.5 99.5 0.995 1.005% 1.100%
1 99.25 0.9925 0.754%
1.5 98.75 0.9875 0.840% 1.000%
2 98.25 0.9825 0.885%
0.900%
(b) Cpn 2.75
Disc 0.800%
Maturity CF factor PV
0.5 1.375 0.9950 1.3681 0.700%
1 1.375 0.9925 1.3647
1.5 1.375 0.9875 1.3578 0.600%
2 101.375 0.9825 99.6009
0.500%
0.4 0.6 0
Price -> 103.6916

(c) Yld 0.884%

Disc at
Maturity CF yield PV
0.5 1.375 0.9956 1.3690 Note the yield appears to be an average of the spot rates
1 1.375 0.9912 1.3629 a particular weight given to the 2-year spot rate.
1.5 1.375 0.9869 1.3569
2 101.375 0.9825 99.6028

Price -> 103.6916

(d) Yld 2.884%

Disc at
Maturity CF yield PV
0.5 1.375 0.9858 1.3555
1 1.375 0.9718 1.3362
1.5 1.375 0.9580 1.3172
2 101.375 0.9443 95.7330

Price -> 99.7418

 Spot rate
1.100%

1.000%

0.900%

0.800%

0.700%

0.600%

0.500%
0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 2.2

average of the spot rates, with

2-year spot rate.
DATE T10Y2Y GDPC1_PCGDP +4
1/1/1948 2.60474 0.93695
4/1/1948 4.57729 -1.04082
7/1/1948 5.39405 -0.58867
GDP +4
10/1/1948 3.88681 -1.53303
10
1/1/1949 0.93695 3.76669
4/1/1949 -1.04082 7.29739
7/1/1949 -0.58867 10.30497 5
10/1/1949 -1.53303 13.36853 f(x) = 0.34242294116828 x + 2.35385564508286
1/1/1950 3.76669 10.563 R² = 0.0202358251388995
0
-3 -2 -1 0 1 2
4/1/1950 7.29739 9.14987
7/1/1950 10.30497 7.25469 -5
10/1/1950 13.36853 5.47138
1/1/1951 10.563 5.17002
-10
4/1/1951 9.14987 3.6014
7/1/1951 7.25469 2.24208
10/1/1951 5.47138 5.36785 -15

1/1/1952 5.17002 6.19177

4/1/1952 3.6014 6.78262
There is some weak evidence that a higher 2s10s (i.e. upw
7/1/1952 2.24208 5.42076 sloping term strucutre) is associated with higher GDP gro
10/1/1952 5.36785 0.52333 and some evidence that an inverted 2s10s curve (i.e. 10-y
1/1/1953 6.19177 -1.7829 lower than 2-year, and 2s10s negative) is associated with
GDP growth. But the evidence is hardly overwhelming, a
4/1/1953 6.78262 -2.43005 many periods of inverted 2s10s have been associated wit
7/1/1953 5.42076 -0.76977 robust GDP growth.
10/1/1953 0.52333 2.72712 Also the low R-squared indicates that while there is a
1/1/1954 -1.7829 6.16876 relationship it's not a very tight one. There is a lot that d
4/1/1954 -2.43005 7.77885 GDP growth variation besides the 2s10s curve.
7/1/1954 -0.76977 8.0145
10/1/1954 2.72712 6.57755
1/1/1955 6.16876 3.21551
4/1/1955 7.77885 2.40214
7/1/1955 8.0145 0.94689
10/1/1955 6.57755 1.99609
1/1/1956 3.21551 3.04952
4/1/1956 2.40214 1.98103
7/1/1956 0.94689 3.07292
10/1/1956 1.99609 0.35477
1/1/1957 3.04952 -2.87228
4/1/1957 1.98103 -2.01912
7/1/1957 3.07292 -0.72476
10/1/1957 0.35477 2.65969
1/1/1958 -2.87228 7.42057
4/1/1958 -2.01912 9.12706
7/1/1958 -0.72476 6.73506
10/1/1958 2.65969 4.59256
 1/1/1959 7.42057 4.9271
4/1/1959 9.12706 2.05828
7/1/1959 6.73506 2.48465
10/1/1959 4.59256 0.88178
1/1/1960 4.9271 -0.66949
4/1/1960 2.05828 1.56445
7/1/1960 2.48465 3.01011
10/1/1960 0.88178 6.39577
1/1/1961 -0.66949 7.56734
4/1/1961 1.56445 6.72771
7/1/1961 3.01011 6.00398
10/1/1961 6.39577 4.30701
1/1/1962 7.56734 3.59786
4/1/1962 6.72771 3.82214
7/1/1962 6.00398 4.81691
10/1/1962 4.30701 5.15826
1/1/1963 3.59786 6.21584
4/1/1963 3.82214 6.18073
7/1/1963 4.81691 5.51982
10/1/1963 5.15826 5.15636
1/1/1964 6.21584 5.47715
4/1/1964 6.18073 5.65929
7/1/1964 5.51982 6.34692
10/1/1964 5.15636 8.46217
1/1/1965 5.47715 8.47749
4/1/1965 5.65929 7.49017
7/1/1965 6.34692 6.0429
10/1/1965 8.46217 4.505
1/1/1966 8.47749 2.92505
4/1/1966 7.49017 2.63749
7/1/1966 6.0429 2.73848
10/1/1966 4.505 2.67086
1/1/1967 2.92505 3.84519
4/1/1967 2.63749 5.51559
7/1/1967 2.73848 5.33668
10/1/1967 2.67086 4.95956
1/1/1968 3.84519 4.4716
4/1/1968 5.51559 3.06714
7/1/1968 5.33668 2.95008
10/1/1968 4.95956 2.04666
1/1/1969 4.4716 0.32494
4/1/1969 3.06714 0.16282
7/1/1969 2.95008 0.42259
10/1/1969 2.04666 -0.16671
1/1/1970 0.32494 2.69724
 4/1/1970 0.16282 3.10662
7/1/1970 0.42259 3.0059
10/1/1970 -0.16671 4.36721
1/1/1971 2.69724 3.47607
4/1/1971 3.10662 5.25518
7/1/1971 3.0059 5.38192
10/1/1971 4.36721 6.89447
1/1/1972 3.47607 7.56189
4/1/1972 5.25518 6.31967
7/1/1972 5.38192 4.77108
10/1/1972 6.89447 4.02376
1/1/1973 7.56189 0.63878
4/1/1973 6.31967 -0.20841
7/1/1973 4.77108 -0.62898
10/1/1973 4.02376 -1.94544
1/1/1974 0.63878 -2.29906
4/1/1974 -0.20841 -1.83426
7/1/1974 -0.62898 0.79868
10/1/1974 -1.94544 2.554
1/1/1975 -2.29906 6.15239
4/1/1975 -1.83426 6.17257
7/1/1975 0.79868 4.95863
10/1/1975 2.554 4.31481
1/1/1976 6.15239 3.22598
4/1/1976 6.17257 4.46634
7/1/1976 1.22 4.95863 5.77089
10/1/1976 1.47 4.31481 5.01203
1/1/1977 1.41 3.22598 4.11707
4/1/1977 1.12 4.46634 6.07814
7/1/1977 0.59 5.77089 5.24578
10/1/1977 0.56 5.01203 6.6581
1/1/1978 0.45 4.11707 6.5099
4/1/1978 0.14 6.07814 2.65687
7/1/1978 -0.14 5.24578 2.38993
10/1/1978 -0.83 6.6581 1.28456
1/1/1979 -0.61 6.5099 1.42078
4/1/1979 -0.16 2.65687 -0.77507
7/1/1979 -0.66 2.38993 -1.62381
10/1/1979 -0.9 1.28456 -0.03914
1/1/1980 -1.99 1.42078 1.59998
4/1/1980 1.12 -0.77507 2.96869
7/1/1980 -0.27 -1.62381 4.32576
10/1/1980 -0.63 -0.03914 1.29991
1/1/1981 -0.04 1.59998 -2.19034
4/1/1981 -0.8 2.96869 -1.01055
 7/1/1981 -0.85 4.32576 -2.5559
10/1/1981 0.35 1.29991 -1.44315
1/1/1982 -0.34 -2.19034 1.43146
4/1/1982 -0.22 -1.01055 3.26853
7/1/1982 0.5 -2.5559 5.73717
10/1/1982 0.88 -1.44315 7.89998
1/1/1983 0.75 1.43146 8.57827
4/1/1983 0.73 3.26853 7.9967
7/1/1983 0.91 5.73717 6.90084
10/1/1983 0.97 7.89998 5.5758
1/1/1984 0.93 8.57827 4.55511
4/1/1984 0.67 7.9967 3.68423
7/1/1984 0.4 6.90084 4.26246
10/1/1984 1.53 5.5758 4.18224
1/1/1985 1.22 4.55511 4.14552
4/1/1985 1.58 3.68423 3.70153
7/1/1985 1.43 4.26246 3.11923
10/1/1985 1.02 4.18224 2.90815
1/1/1986 0.47 4.14552 2.71613
4/1/1986 0.54 3.70153 3.35882
7/1/1986 1.07 3.11923 3.26728
10/1/1986 0.88 2.90815 4.4793
1/1/1987 0.97 2.71613 4.24228
4/1/1987 0.9 3.35882 4.4846
7/1/1987 1.03 3.26728 4.19282
10/1/1987 1.06 4.4793 3.7989
1/1/1988 1.16 4.24228 4.31521
4/1/1988 0.8 4.4846 3.7483
7/1/1988 0.44 4.19282 3.90812
10/1/1988 0 3.7989 2.74381
1/1/1989 -0.43 4.31521 2.8213
4/1/1989 0.02 3.7483 2.41276
7/1/1989 -0.15 3.90812 1.72721
10/1/1989 0.06 2.74381 0.60288
1/1/1990 0.01 2.8213 -0.9502
4/1/1990 0.19 2.41276 -0.53884
7/1/1990 0.8 1.72721 -0.10272
10/1/1990 0.93 0.60288 1.16642
1/1/1991 1.03 -0.9502 2.85865
4/1/1991 1.34 -0.53884 3.16957
7/1/1991 1.48 -0.10272 3.66535
10/1/1991 1.94 1.16642 4.38298
1/1/1992 1.94 2.85865 3.32091
4/1/1992 2.31 3.16957 2.80787
7/1/1992 2.57 3.66535 2.28771
10/1/1992 2.14 4.38298 2.60856
1/1/1993 2.07 3.32091 3.43094
4/1/1993 1.77 2.80787 4.22545
7/1/1993 1.51 2.28771 4.33665
10/1/1993 1.58 2.60856 4.11576
1/1/1994 1.56 3.43094 3.48112
4/1/1994 1.15 4.22545 2.40225
7/1/1994 1 4.33665 2.67322
10/1/1994 0.15 4.11576 2.19967
1/1/1995 0.4 3.48112 2.60111
4/1/1995 0.42 2.40225 4.00206
7/1/1995 0.34 2.67322 4.04982
10/1/1995 0.4 2.19967 4.42122
1/1/1996 0.55 2.60111 4.31406
4/1/1996 0.62 4.00206 4.30807
7/1/1996 0.62 4.04982 4.67389
10/1/1996 0.55 4.42122 4.48786
1/1/1997 0.47 4.31406 4.85529
4/1/1997 0.43 4.30807 4.09597
7/1/1997 0.32 4.67389 4.09774
10/1/1997 0.09 4.48786 4.87911
1/1/1998 0.07 4.85529 4.82407
4/1/1998 -0.05 4.09597 4.66137
7/1/1998 0.14 4.09774 4.72039
10/1/1998 0.11 4.87911 4.80665
1/1/1999 0.26 4.82407 4.19958
4/1/1999 0.28 4.66137 5.29774
7/1/1999 0.27 4.72039 4.07533
10/1/1999 0.21 4.80665 2.97348
1/1/2000 -0.47 4.19958 2.30971
4/1/2000 -0.35 5.29774 1.05724
7/1/2000 -0.18 4.07533 0.50359
10/1/2000 0.01 2.97348 0.15349
1/1/2001 0.75 2.30971 1.31828
4/1/2001 1.17 1.05724 1.33961
7/1/2001 1.74 0.50359 2.21437
10/1/2001 2 0.15349 2.09454
1/1/2002 1.7 1.31828 1.77093
4/1/2002 1.96 1.33961 2.0284
7/1/2002 1.91 2.21437 3.30181
10/1/2002 2.22 2.09454 4.32636
1/1/2003 2.32 1.77093 4.30456
4/1/2003 2.22 2.0284 4.20302
7/1/2003 2.46 3.30181 3.43159
10/1/2003 2.43 4.32636 3.28179
 1/1/2004 2.26 4.30456 3.87068
4/1/2004 1.92 4.20302 3.56089
7/1/2004 1.51 3.43159 3.5055
10/1/2004 1.16 3.28179 3.12611
1/1/2005 0.7 3.87068 3.35389
4/1/2005 0.28 3.56089 3.11947
7/1/2005 0.16 3.5055 2.3665
10/1/2005 -0.02 3.12611 2.5907
1/1/2006 0.04 3.35389 1.48229
4/1/2006 -0.01 3.11947 1.82569
7/1/2006 -0.07 2.3665 2.22081
10/1/2006 -0.11 2.5907 1.97348
1/1/2007 0.07 1.48229 1.14924
4/1/2007 0.16 1.82569 1.09243
7/1/2007 0.62 2.22081 0.00188
10/1/2007 0.99 1.97348 -2.75308
1/1/2008 1.83 1.14924 -3.28907
4/1/2008 1.36 1.09243 -3.92445
7/1/2008 1.85 0.00188 -3.04978
10/1/2008 1.49 -2.75308 0.18287
1/1/2009 1.9 -3.28907 1.71025
4/1/2009 2.42 -3.92445 2.79607
7/1/2009 2.36 -3.04978 3.17821
10/1/2009 2.71 0.18287 2.56945
1/1/2010 2.82 1.71025 1.93063
4/1/2010 2.36 2.79607 1.7215
7/1/2010 2.11 3.17821 0.94904
10/1/2010 2.69 2.56945 1.60935
1/1/2011 2.67 1.93063 2.65176
4/1/2011 2.73 1.7215 2.36151
7/1/2011 1.67 0.94904 2.52812
10/1/2011 1.64 1.60935 1.46857
1/1/2012 1.9 2.65176 1.57195
4/1/2012 1.34 2.36151 1.26165
7/1/2012 1.42 2.52812 1.91742
10/1/2012 1.53 1.46857 2.61412
1/1/2013 1.62 1.57195 1.42572
4/1/2013 2.16 1.26165 2.67201
7/1/2013 2.31 1.91742 3.11773
10/1/2013 2.66 2.61412 2.87685
1/1/2014 2.29 1.42572 4.14775
4/1/2014 2.06 2.67201 3.45201
7/1/2014 1.94 3.11773 2.57477
10/1/2014 1.5 2.87685 2.16428
1/1/2015 1.38 4.14775 1.77694
 4/1/2015 1.71 3.45201 1.40825
7/1/2015 1.42 2.57477 1.59194
10/1/2015 1.21 2.16428 2.06758
1/1/2016 1.05 1.77694 2.06682
4/1/2016 0.91 1.40825 2.18386
7/1/2016 0.83 1.59194 2.37131
10/1/2016 1.25 2.06758 2.70333
1/1/2017 1.13 2.06682 3.07713
4/1/2017 0.93 2.18386 3.32519
7/1/2017 0.86 2.37131 3.1163
10/1/2017 0.51 2.70333 2.47552
1/1/2018 0.47 3.07713 2.2658
4/1/2018 0.33 3.32519 1.96316
7/1/2018 0.24 3.1163 2.07648
10/1/2018 0.21 2.47552 2.33888
1/1/2019 0.14 2.2658 0.31926
4/1/2019 0.25 1.96316 -9.13962
7/1/2019 0.05 2.07648
10/1/2019 0.34 2.33888
1/1/2020 0.47 0.31926
4/1/2020 0.5 -9.13962
7/1/2020 0.55
 GDP +4
10

6828 x + 2.35385564508286
88995
0
0 1 2 3 4

-5

-10

-15

e that a higher 2s10s (i.e. upward

sociated with higher GDP growth,
nverted 2s10s curve (i.e. 10-year
s negative) is associated with weaker
ce is hardly overwhelming, and
10s have been associated with fairly

ates that while there is a

ght one. There is a lot that drives
es the 2s10s curve.