# Bootstrapping

Did anyone figure that one out on the PM??? Spent about 15 minutes tryin to figure that one out. Trying to solve for the Foward rate. What did ya put as the answer?

(1+z3)^3 = (1+z2)^2(1+1f2) Dont remember the answer…

I think it only could’ve been 1 of the last 2 rates listed & I chose the lower of those 2.

ya i just guessed the last one 6.4

it asked one year rate two year from now. and the question provide the spot rate start with 0.5 year all the way to year 3

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6.4 is correct

i got 6.1

Hope 6.4 is correct. I know the formula, but I had a difficulty to recall it on the exam, so it was a best guess after having reviewed the available spot rates

If i remember correctly, the question was asking for 1 year rate - 2 years from now, so it would be calculated based on (1+3-yr spot rate)^3 = (1+2-yr spot rate)^2 x (1+X) so it it ends up to be 6.4 But if you have to take a guess, the 1 yr rate 2 years from now would be noticeably higher than the previous rates since the first two years, rates are low, which leaves the first two choices out (both are below 5.7 i think) and 6.1 just aint high enough to compensate the first two years.

how did the exam go sfagan?

First part was easy definitly >85 think i got a little too relaxed for the second one. probably in the 60’s. So thinkin it should balance out. Checked a few of the questions I guessed on and happened to get lucky. But pretty much what I expected. How about you?

It went well, but the afternoon was definitely harder. Sort of more what I expected. Hopefully we both made it!

Pretty sure the correct answer was 5.7%. All the spot rates were provided as BEY, so you needed to convert them to EAY using (1+BEY/2)^2-1 formula. Then you apply: (1+3-yr spot rate)^3 = (1+2-yr spot rate)^2 x (1+X) and solve for X. Anyone remembers, what were the spot rates?

Spot rates I believe are that specific period’s rate that we will receive interest on. So I dont believe you need to convert to an EAY. Yield and spot rates are different because Yield assumes that all cashflows are earning that specific yield, whereas spot rate disputes that fact. Thats why the spot curve mostly is upward sloping. Always when the par yield slopes upward Forward rate > Spot > Yield.

I clearly remember that (BEY) was in parenthesis. Also, the question had 6 spot rates with 0.5 year steps. So to have meaningful basis of comparison you would need to convert them into either annual or semiannual rates.

If they were in BEY - probably only the 0.5 year. Else we would have need to run a bootstrapping for every single semi annual to get the spot rate. As far as I remember, we werent given any other info than to calculate 2f1

I did that, converted it to ytm, came out to the same answer just lil closer, I think it was 6.4, don’t remember tho. I did it like 4 ways, each way came out pretty close to the same thing.

yeah you had to do it as periodic rates (half of the bey) i think. then double the periods (raise to 4 instead of 2) can’t remember my answer - in fact i can’t remember hardly any answers - it’s like a blur.

Implied forward rate is nothing special, as long as spot rates are given. Honestly, there is no way all those rates yield. I believe you had to use only the 3rd year spot rate and the 2nd year spot rate. All other rates were irrelevant to calculate the implied forward rate. Like other Schweiser or mock exam, they always give other rates to distract us.