Bootstrapping for Bonds and Zero Coupon Bond Price
Posted: September 7th, 2007, 5:38 am
I have the following bonds and I am trying to find the Prices of the Zero Coupon Bonds for Maturities for 0.5, 1.0, 1.5 and 2.0 Years respectively. The prices for Zero coupon has to be found through Linear Equations. I am not able to get the right Prices and would like someone to tell me where I am going wrong. Maturity Face Coupon Yield toYears Value Rate Maturity2.0 $ 100,000 6.00% 5.7315%2.0 $ 50,000 4.00% 5.7374%1.5 $ 250,000 8.00% 5.4871%1.0 $ 250,000 6.00% 5.2463%The approach to find the Prices was to find the Prices of the Bonds discounted using the YTM rates I get. The Bond Prices are as follows. B1 100500.6266B2 48380.39617B3 258929.0115B4 251812.6206I calculate the cash flows for each of the Bonds and I get the Present Value of the cash Flows so that I can use them in the Matrix to solve the coefficients linearly. So I get the following Equation. 2916.422619 2835.17363 2756.188168 91992.84223 = 100500.6266972.1129945 945.0036741 918.6503515 45544.62915 = 48380.396179732.971072 9473.072589 239722.9678 1 = 258929.01157308.292525 244504.3281 1 1 = 251812.6206I have four equations with coefficients that indicate P6, P12, P18 and P24 i.e. prices for 6 months, 12 months, 18 months and 24 months. To Solve the matrix I inverse the matrix and try to multiply the Matrix with RHS i.e. the price of the bonds but I am not getting the right Prices. I know I am going wrong some where in this Step and would like someone to guide me in the right direction. Inverse of Matrix looks like the one below: 0.001123954 -0.002270207 -0.000004223 -0.000004095 -0.000033595 0.000067856 0.000000126 0.000004212-0.000044306 0.000089491 0.000004338 0-0.000022399 0.000067199 0 0Now if I use the prices of the Bonds and try to multiply with this matrix I dont get the correct answer. I am not doing something right and would like to know how to solve for the four unknowns in this matrix. I need some guidance on this please. Many Thanks.From here on I am in a FIX as to how to get the prices.