Part 4: The Bootstrap Method

In practice, we can also derive a zero curve from market prices of Treasury securities, using the bootstrap method. Consider the data in the following table on a bond dealers quotes of five Treasury bills/notes. Note that the first two bills pay no coupons.

Bond principal ($)Time to maturity (years) Annual coupon ($) Bond price($)

 100 0.50 0.0 98 100 1.00 0.0 95 100 1.50 6.2 101 100 2.00 8.0 104

(Half the stated coupon is assumed to be paid every six months.)

1. Calculate(semiannually-compounded)zeroratesformaturitiesof6months, 12months, 18 months, and 24 months.

2. Estimate the price and yield of a 2-year bond providing a semiannual coupon of 7% per annum.