Hi I am not sure if I'm doing this right. Like last time I mean spot rates like 3% for a term of 1 year etc.
given the following term structure of spot rates
year 1 3%
year 2 3.2%
year 3 5%
what does "term structure" mean by the way?
If you purchased a synthetic bond made up of one 3 year 0 coupon bond and two 1 year 0 coupon bonds today, what will be your one year holding period return if there is a 0.5% downward shift in the term structure in the coming year?
price now assuming a $1000 face value
1000/ 1.05^3=863.84
1000/1.03=970.87
total price 863.84+970.87 +970.87 =2805.58
price after shift
1000/1.045^3= 956.94
1000/1.025=975.61
new total price= 956.94+975.61+975.61=2908.16
holding period return = (End-Of-Period Value - Initial Value) /(Initial Value)
holding period return = (2908.16-2805.58)/2805.58=0.037%
is this correct?
thanks
rbcc
given the following term structure of spot rates
year 1 3%
year 2 3.2%
year 3 5%
what does "term structure" mean by the way?
If you purchased a synthetic bond made up of one 3 year 0 coupon bond and two 1 year 0 coupon bonds today, what will be your one year holding period return if there is a 0.5% downward shift in the term structure in the coming year?
price now assuming a $1000 face value
1000/ 1.05^3=863.84
1000/1.03=970.87
total price 863.84+970.87 +970.87 =2805.58
price after shift
1000/1.045^3= 956.94
1000/1.025=975.61
new total price= 956.94+975.61+975.61=2908.16
holding period return = (End-Of-Period Value - Initial Value) /(Initial Value)
holding period return = (2908.16-2805.58)/2805.58=0.037%
is this correct?
thanks
rbcc