I feel so stupid trying to do this… I dont know if the book doesnt give me enough information or I just flat out dont understand. Page 274 in CFAI Volume 5 (Fixed Inc), they give me the following info: Maturity YTM Market Price (also Par value) 1 yr 3.5% 100 2 yr 4.2% 100 3 yr 4.7% 100 4 yr 5.2% 100 these are annual bonds to “simplify” the question for me. So next it tells me that using the bootstrapping techniques explained at L1, the spot rates are given below: Year Spot rate 1 3.5000% 2 4.2148% 3 4.7352% 4 5.2706% Next it goes on to find 1 year forward rates, but i need to take this one step at a time. No matter what I read online (it is hard to find a formula believe it or not) I can not make these numbers work in the calculator. Can anyone help?
Look for Year 2: 4.2 is the coupon payment for each year. 100 is the par value of the bond and 3.5% is the Spot rate for year 1… that is a given and will carry forward. Now solve for r2 in the equation below: 100 = 4.2/1.035 + 104.2/(1+r2)^2 r2 = 4.2148% For year 3 4.7 coupon, year 1 spot=3.5, year 2 spot = 4.2148 solve for r3 100 = 4.7/(1.035) + 4.7/(1.042148)^2 + 104.7/(1+r3)^3 r3 = 4.7352% and so on.
Thanks for the clear up… So you are looking for the present value of each coupon payment essentially, subtracting that from par value and then solving for rn^n. I think i understand now… Your help is much appreciated.