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# W. P.

Yield Curve:
We have used the data points given in Exhibit 1 (Coupon rate, price and maturity date) to find out
the yield to maturity for all the securities. Taking the current date as 15-Aug-2003 we have calculated
the remaining maturity for all the securities in half yearly terms. After that we have used the YEILD
function in Excel to calculate the appropriate annual-yield to maturity rate for each of the treasury
securities.
The syntax of the function is: YIELD( settlement, maturity, rate, pr, redemption, frequency)

Settlement - The settlement date of the security (i.e. the date that the coupon is purchased).
Maturity - The maturity date of the security (i.e. the date that the coupon expires).
Rate - The security's annual coupon rate.
Pr - The security's price per \$100 face value.
Redemption - The security's redemption value per \$100 face value.
Frequency - The number of coupon payments per year. This must be one of the following:
o 1
Annually
o 2
Semi-Annually (As treasury securities pay interest semi-annually)
o 4
Quarterly

For the security that matures in 6 months, we got yield as 0.882%, similarly for the security that matures
in 12 months, we got yield as 1.191% and so on.
Then we calculated the respective annualized spot rates / zero coupon yields by equating the discounted
cash flows to the price of security using different discount rates.
For example, for obtaining the zero coupon yield for 1-year treasury security we have used the
following approach:
(\$2.125/2)/(1+0.00882/2)1 + \$102.125.0/(1+z2/2)2 = \$100.9254, then we have z2 =1.193%.
Using this 0.5 year and 1 year zero coupon yield, we have obtained the zero coupon yield for 1.5year security using the same principles (i.e. sum of the cash flows discounted at the respective discount
rates should equal to the current price of the bond). The price of remaining securities is calculated in a
similar manner.

Using the zero coupon yields calculated we have plotted the yield curve using various maturities and
their respective zero coupon yields. The yield curve is as shown below:

## Yield Curve (Zero Coupon Yield)

7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

10

15

20

25

30

Years

The yield curve is mostly normal with a slight inversion at the end after 24 years and a minor flat/hump
in the 8-10 year range.