INVESTMENTS

Financial Bootstrapping and Investments



Financial Bootstrapping and Investments

Part 1: Bootstrapping

Price ($)

Coupon

Maturity

949

Zero

1

1020

7.5%

2

1029

8.5%

3

Year 1 = $76.25 + $ 1020 = $1096

Year 2 = $ 82.23 + $ 1096 = $1178.7

Interest Rate = ($1178.7 - $1000)/ 1000 * 100

Interest Rate = 17.87 %

The term structure of the interest rates can be conceptualized using the bootstrapping approach. A bootstrap is a reconstruction of a yield curve from discontinuous elements. The process of obtaining spot zero rates or spot discount factors from the Coupon term structure is called the yield curve bootstrap (Lofthouse 2001). It proceeds step-by-step from the shortest to the longest maturity and ...