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In the article, example 4 we are asked to determine the yield curve.
My question is, where does the figure in Bond B 5.78
and the figures in Bond C 4.81 and 4.54 come from ?
Kind Regards
D
They are calculated by re-arranged the equations immediately above.
For example, for bond B:
102 = (6 / 1.0388) + (1.06 / ((1+r2)^2))
6/1.0388 = 5.78, therefor:
102 = 5.78 + (1.06 / ((1+r2)^2))
Therefore 102 – 5.78 = 1.06 / ((1+r2)^2)
Therefore 1+ r2 = sq root of ((106 / (102 – 5.78))
(I assume that you are happy about the fact that something to a negative power is a way of typing 1 divided by the same number to the positive power, and that writing something to the power 1/2 is a way of writing to take the square root).
The same workings apply to Bond C.
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