Exercise 1.1 Term Structure Construction For the Treasury curve with the data given below. Tenor Price Coupon Cpn Freq 1 100 0.21% 2 100 0.23% 3 100 0.28% 5 100 0.48% 7 100 0.71% 10 100 0.97% 20 100 1.36% 30 100 1.45% a) Estimate the forward rates assuming they are piecewise constant. b) Estimate the forward rates assuming they are piecewise linear. Ending forward rate for interval equals the starting forward rate for next interval. Functional form of the forward rates are given below Years Constant Beg/End Years Linear Begin Linear End 0-1 FWD1 0-1 FWD1 FWD1 FWD1 FWD2 1-2 FWD2 1-2 2 2 2 2 2 2 2 2 2-3 5-7 FWD5 FWD3 2-3 5-7 FWD2 FWD3 FWD4 FWD3 FWD4 FWD5 3-5 FWD4 3-5 7-10 10-20 FWD6 FWD7 7-10 10-20 FWD5 FWD6 FWD6 FWD7 Can use excel with the solver function for this exercise. 20-30 FWD8 20-30 FWD7 FWD8 Exercise 1.1 Term Structure Construction For the Treasury curve with the data given below. Tenor Price Coupon Cpn Freq 1 100 0.21% 2 100 0.23% 3 100 0.28% 5 100 0.48% 7 100 0.71% 10 100 0.97% 20 100 1.36% 30 100 1.45% a) Estimate the forward rates assuming they are piecewise constant. b) Estimate the forward rates assuming they are piecewise linear. Ending forward rate for interval equals the starting forward rate for next interval. Functional form of the forward rates are given below Years Constant Beg/End Years Linear Begin Linear End 0-1 FWD1 0-1 FWD1 FWD1 FWD1 FWD2 1-2 FWD2 1-2 2 2 2 2 2 2 2 2 2-3 5-7 FWD5 FWD3 2-3 5-7 FWD2 FWD3 FWD4 FWD3 FWD4 FWD5 3-5 FWD4 3-5 7-10 10-20 FWD6 FWD7 7-10 10-20 FWD5 FWD6 FWD6 FWD7 Can use excel with the solver function for this exercise. 20-30 FWD8 20-30 FWD7 FWD8