Question: Today is December 12, 2008 and TIPS prices are in Table 7.8. (a) Use the extended Nelson Siegel model in Equation 7.28 to calculate the

Today is December 12, 2008 and TIPS prices are in Table 7.8.
(a) Use the extended Nelson Siegel model in Equation 7.28 to calculate the real discount curve and real yield curve.

(b) Your estimates for the extended Nelson Siegel model's parameters should be close to (0 = 6278.3013,(1 = -6278.227, (2 = -6289.189, (3 = -0.18763, k1 = 27056.491, and k2 = 32.190532. Given Equation 7.28, which describes the application of the extended Nelson Siegel model to real interest rates, can you see what the short-term interest rate r(0) [i.e., r(0, T) when T ( 0] is by looking only at the parameters?
(c) Using the real term structure, price the a 2% Coupon TIPS with maturity 4/14/2012 and index ratio 1.07817.
(d) On December 12, 2008, the TIPS priced in Part (c) was actually trading at 95 15/16. Is your price close to trading price?

De Fed Funds Trget Payroll Growch Anual Inflatioe Fed Funds Futa Security Maturity Coupon Index Ratio 1/15/2014 1/15/2016 7/15/2014 1/15/2026 1.18406 1.10231 1.16067 1.10231 91 7/32 90 1/2 85 25/32

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