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Homework Help: Financial mathematics - estimating a yield curve

  1. Jun 7, 2008 #1
    The problem is to estimate a zero-coupon yield curve for up to 5 years ahead, knowing (for time t=0) the following:
    bond 1: coupon 6.5, maturity - 1 year, price = 103
    bond 2: coupon 5, maturity - 2 years, price = 102
    bond 3: coupon 4.2, maturity - 3 years, price = 100
    bond 4: coupon 6.5, maturity - 4 years, price = 104
    bond 5: coupon 5.2, maturity - 5 years, price = 99
    price of a 1-week treasury bill of face value=100, is 99.94

    I have digged through several papers on modelling yield curves and still am stuck. Given the relatively not-advanced-at-all mathematical prerequisites needed for the financial maths class i'm attending, i shyly presume that i should use a Nelson-Siegel-Svensson model here. Then - please correct me if I'm wrong - the task in fact is to solve an optimization problem of finding the parameters that generate theoretical prices for the given bonds and a bill that are the closest to their given market prices (using some MSE or RMSE estimator i guess).

    How to implement that however is a mystery for me. Are such problems to be solved in some sophisticated maths software? Since the optimization problem here is non-linear i think it can't be 'treated' by Excel Solver (which i happen no to have anyway)?

    I'd be thankful for any hint about this.

    And by the way please excuse me for my lousy foreigner-vocabulary. ;)
  2. jcsd
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