Fixed Income: Computed value from interest rate tree??

CFA Level II
#1

In the CFAII FI book, pg306/307, they give you the interest rate tree. But how do you get the computed value from that? I’ve tried entering different combinations of values into my hp calc, but nothing’s coming out correctly. For ex, Today: r=3.5%. in 1 year: H=5.4289% and low =4.4448%. The coupon pmt is 4.7. How are they calculating 97.823 as the computed value for high and 99.777 as the computed value for low? I can’t find an example anywhere in the book. Many thanks!!

#2

you need to work from the right extreme of the tree if you read in the text they also show you how they calculate it. what were the prior node calculations… on the high and the low side? you will find two values for each. take the average of those values, add 4.7 to that, then divide by 1.054289 to get 97.823

#3

Thanks CP!

#4

Hi All, A follow up question (man, fixed income is not my thing!): p.315 in CFA FI book: “Exhibit 12 shows the adjusted tree by shifting the yield curve up by…25bps, and then adding 35 bps (the OAS) to each 1yr rate” The Yr 3 NHHH rate is 9.8946%. How do you get this? 9.8946%-35bps = 9.5446. But this is not w/in 25bps of the original bond. How do you adjust for the shift of 25bps? Thanks All.

#5

Hi All, A follow up question (man, fixed income is not my thing!): p.315 in CFA FI book: “Exhibit 12 shows the adjusted tree by shifting the yield curve up by…25bps, and then adding 35 bps (the OAS) to each 1yr rate” The Yr 3 NHHH rate is 9.8946%. How do you get this? 9.8946%-35bps = 9.5446. But this is not w/in 25bps of the original bond. How do you adjust for the shift of 25bps? Thanks All.

#6

I’ll take a look at the book later tonight and post up if I find something. Do not have my book with me right now.

#7

I do not believe we are expected to know how the rates came by… think along lines of how the values at each point were arrived…

#8

Thanks CP