Nonhorizontal Yield Curves and Bond Tutor

In this topic, we will work through the exercise developed in topic 3.4, Pricing Relative to the Yield Curve, using the "Bond Values and the Term Structure" subject in Bond Tutor. By choosing this subject the following screen appears:

If you click on the Numeric Term Structure button you will see the following default yield curve:

You can also see this graphically by clicking on the Graphic Term Structure button:

In the example provided in Topic 3.4, the spot interest rates are 4%, 6.96%, and 9.89%, for Years 1-3, respectively. You can change the first three spot rates by double-clicking and typing directly into each yield cell. You can delete the remaining rows by choosing Delete Row in the Edit menu. This results in:

Be sure to click the OK button on the Yield Curve (Numeric) screen when entering the spot rate information. Graphically, this is displayed as:

Now you are ready to solve the value for each bond. For example, consider first the one year zero-coupon bond. Enter the following information into Bond Tutor.

Similarly, the two year zero-coupon bond can be entered as follows:

For the case of the coupon bond, this is:

By clicking on the numeric button you will see the present value of each cash flow component (Year 1 coupon payment, Year 2 coupon payment, and Year 3 face amount plus coupon payment):

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