5.1 Interest rate Markets Chapter 5 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 5.1 Interest Rate Markets Chapter 5
5.2 Types of Rates Treasury rates ·L| BOR rates Repo rates Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 5.2 Types of Rates • Treasury rates • LIBOR rates • Repo rates
53 Zero rates a zero rate(or spot rate), for maturity T is the rate of interest earned on an nvestment that provides a payoff only at time t Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 5.3 Zero Rates A zero rate (or spot rate), for maturity T is the rate of interest earned on an investment that provides a payoff only at time T
5.4 Example(Table 5.1, page 95) Maturity Zero Rate (years)(% cont comp) 0.5 5.0 1.0 5.8 1.5 6.4 2.0 6.8 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 5.4 Example (Table 5.1, page 95) Maturity (years) Zero Rate (% cont comp) 0.5 5.0 1.0 5.8 1.5 6.4 2.0 6.8
5.5 Bond Pricing o calculate the cash price of a bond we discount each cash flow at the appropriate zero rate In our example, the theoretical price of a two year bond providing a 6% coupon semiannually is 0.05×0.5 0.058×1.0 0.064×1.5 e +3e +3e +103e-000×20=9839 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 5.5 Bond Pricing • To calculate the cash price of a bond we discount each cash flow at the appropriate zero rate • In our example, the theoretical price of a twoyear bond providing a 6% coupon semiannually is 3 3 3 103 98 39 0 05 0 5 0 058 1 0 0 064 1 5 0 068 2 0 e e e e − − − − + + + = . . . . . . . .