Pricing IRS – Module I – Term Structures EXCEL Example
About the course
The course consists of an EXCEL file that illustrates the construction of a spot rate term structure and a forward rate term structure.
The methodology followed in the file is as follows:
- Par term structures are obtained from the interbank rates and treasury rates
- Cash flows (coupon and principal payments) of coupon bearing bonds are determined from the par term structures
- Cash flows are stripped so that each individual cash flow may be considered a zero coupon bond structure
- Individual cash flows are discounted, summed and equated to the par values of bonds to determine the zero coupon curve (spot rate) term structure
- Forward curve term structure is derived from bootstrapping the derived zero coupon curve term structure
- The resulting spot and forward term structures derived are plotted
It also includes a PDF file which explains the derivation of the Zero Curve and Forward Rates.
After taking this course you will be able to:
- Define a par term structure from observable market rates
- Determine cash flows from the par term structure
- Strip cash flows to obtain a zero coupon bond structure
- Derived spot rates based on the discounted value of the stripped cash flows and the par values of the bonds
- Bootstrap the zero coupon rates to obtain the forward rate term structure
- Plot the term structures
The student should be comfortable with basic mathematics, statistics, probability and EXCEL including the use & interpretation of the EXCEL VLOOKUP & HLOOKUP functions.
They must be familiar with the concepts of bootstrapping & the relationship between forward and stop (zero) rates.
This course is for beginners in the finance field and also for individuals involved in pricing and valuation of interest rate sensitive instruments.