CFA Level 2 | Fixed Income: Bootstrapping Spot Rates from Par Rates & No-Arbitrage Valuation

[@Sunil-ne8mx]

Thank you for the simple and clear explanation.

[@argos2872]

This video is amazing suddenly I undestood a lot of books about this

[@alliwant8383]

Superb explanation. Simple and clear. Thank you!

[@FabianMoa]

Glad it was helpful!

[@秋様的成长日记]

this video is amazing, it suddenly came to my mind what is "no arbitrage", thanks

[@mauro6015]

Thanks, it best. Come on CFA 2

[@MrJassu2]

Thanks for the explanation in 1 single simple vdo...

[@FabianMoa]

You're most welcome, Jasdeep

[@ayoolaoladotun3246]

Great Video Fabian. Please can you describe how to work out the spot rate from par rate. I see the description but I need to see the work out. Looking forward to your response

[@FabianMoa]

Hi Ayoola, from minute 03:00 onwards, I showed the workings. Might I ask what work out you're asking about?

[@ayoolaoladotun3246]

Fabian Moa Thanks Fabian.... I eventually got the logic. I was looking for a smarter way to derive the spot rate using TVM on my calculator and avoid solving quadratic equations

[@MURILAOBONITAO]

Great content Fabian, thanks for sharing and all the best on your business!

[@FabianMoa]

My pleasure!

[@alikhalifa1988]

Superb explanation.

[@paulinechiu7462]

best explanation ever! thank you so much

[@FabianMoa]

You're welcome!

[@EduardoGallizzi]

Hi, Fabian. Do you have a fully online CFA L3 program? I'm not in Malaysia/Singapore.

[@johnnywong9652]

very concise

[@Anna-mj6hp]

Really well explained! Thanks :)

[@kartikshetty3135]

What is the conceptual interpretation of par rates? Also, why is the spot rate higher than par rate? Refer 3.01 m - here why is the first year coupon rate discounted at 4%, shouldn't it be at the 2year spot rate?

[@grantkasser9599]

for spot rate for (S2) I am getting 4.97% can someone please help. Thank you!

[@FabianMoa]

Continuing from the workings in the video: 1.052/(1 + S(2))^2 = 1 - 0.052/1.04 1.052/(1 + S(2))^2 = 0.95 S(2) = [1.052/0.95]^(1/2) - 1 = 5.2316%

[@grantkasser9599]

thank you so much!!

[@Bobstaaar]

@@FabianMoa This was very helpful!

[@sajadahmad333]

Hi, Might be a dumb question but the bootstrapping looked like you are deriving par rates from spot rates not otherwise.

[@FabianMoa]

Really? It is actually deriving the spot rates from the par rates

[@Jean-JacquesSimonis]

How can I bootstrap in excel, while doing it efficiently as a have a large data set where I have to calculate about 120 periods of spot rates?

[@FabianMoa]

VBA would be a more efficient way of doing it.

[@FRESHENDEAVOUR]

Thanks for this video - where did you get the par value from?

[@FabianMoa]

It's arbitrary. You can use any value you want, such as $100 or 1000 or 500

[@FRESHENDEAVOUR]

@@FabianMoa thank you!

[@FRESHENDEAVOUR]

@@FabianMoa please could I also ask how you would / should compute this in Excel? e.g. how to set it out re bootstrapping?

[@FabianMoa]

kzbin.info/www/bejne/j3KXfqqBZ7yCqrc Watch from 04:20

[@谭婉芳]

hi! Is the spot rate the same as zero-coupon rate?

[@FabianMoa]

Yes, the spot rate is also called the zero coupon bond yield

[@clem2248]

Thanks :) It helped me a lot

[@FabianMoa]

Glad to hear that!

[@ericgregorious7047]

Is there a quick way to solve the Spot rate? Cos it seems to me like trial and error?

[@ericgregorious7047]

Never mind I am being an idiot

[@ricardoromeroescobar4631]

Thanks a lot for the simple explanation. Question, how can i compute the two-year forward rate starting from 1 and 2 year from now? if i have the spot rate today s2= 5.2316% the procedure is the same as in f1?

[@FabianMoa]

To get the 2-yr forward rate starting 1 year from now, you would need the * 1 year spot rate, S1 * 3 year spot rate, S3 f(1,2) = ((1+S3)^3)/(1+S1))^(1/2) - 1 To get the 2-yr forward rate starting 2 year from now, you would need the * 2 year spot rate, S2 * 4 year spot rate, S4 f(2,2) = ((1+S4)^4)/(1+S2)^2)^(1/2) - 1

[@ricardoromeroescobar4631]

@@FabianMoa Thx a lot

[@makiolo]

Is same forward rate and par rate ? Both start in future date ...

[@FabianMoa]

Nope. Forward rate starts at a future date. Par rate starts today, just like spot rate

[@Ale.A93]

Hey Fabian, do you know how to calculate the last exercise (using spot rates) in HP12c? My problem is with inserting different rates to find the pv

[@FabianMoa]

Hi Alexandre, I'm not proficient with HP12c, can't help there. Sorry

[@johnlin8588]

why dont we need to discount the forward rate to today since it's in the future? eg. at 5:56, the forward rate is 6.4778% - does this not need to be discounted by 4% to get the forward rate in today's/pV terms when buying/selling the bond future?

[@FabianMoa]

No need to do that. If you are going to buy the bond forward at T = 1, so you just need to know the 1yr fwd rate in 1 year, which is 6.4878%. That means a $1 in Year 2 discounted back by 1 year at 6.4778%, or $1/1.064778 = $0.9392 (in Year 1). That is the price you will lock in today (T = 0) to pay in Year 1, if you enter into a 1 year forward contract

[@johnlin8588]

@@FabianMoa thanks for the explanation. Does this mean that the current 2Y spot rate will also be 6.4778% in 1 year's time (roll down the curve) if the curve does not change (i.e. interest rates remain the same?)

[@yyman9100]

Hey Fabian, thanks for sharing such a nice video! Like the idea of timeline - i was like die die memorizing it previously 😂

[@FabianMoa]

Ya. It's easier with the timeline

[@Жанна-л7р]

спасибо большое за объяснение👍👍👍

[@s.m.hassan3887]

i m confused with when we should compound rates ??

[@FabianMoa]

If they use general terms like yield or effective rates, use compounding. If they use LIBOR for eg, use simple interest

[@riteshbhagat4176]

It was a feeble explanation and I didn't understand the how the 0.052/1.04 came in there and how did you do it and also the further explanation