**Calculating
Zero Rates, Forward Rates, and Duration**

**Rule: **You may ask another student for help when doing
this homework (although you *must* try to do as much of it as you can on your
own). You may not take the work of another and submit it or use it as your own.

This is a difficult assignment and will take a long time to complete. It is based on chapter 4 from Hull and on lecture7 (and handout) from Professor Evans. You must complete this homework prior to the second exam and will use the output from this homework during the exam. Further instructions about this will be given in class.

This assignment that requires you to use an Excel Workbook
labeled *Calculating Zero and Forward Rates and Duration (*zfd.zip). Make a copy of the workbook and keep the original
as a master copy, using the new copy for this assignment.

The purpose of this homework is to show you how the complicated formulas for are coded (using Excel as an example).

You will want to review the material from Lecture 7 that discussed the determination of zero rates, forward rates, and duration.

This homework is done in three steps:

**Step 1: **Using
the worksheet labeled ** Zero Rates**, use the default data provided
and the techniques described in both the lecture and in Hull section 4.5 to
calculate the Discount rate and Zero rate in the yellow cells for the
components of this two year note.

**Step 2: **Using
the worksheet labeled ** Forward Rates**, where you are given 5
default zero rates, using formula 4.5 from Hull or my formula from the lecture
slide labeled

**Step 3: **Using
the worksheet labeled ** Duration**, use the default values of a 7%
coupon and a 5% current yield to calculate the cash payment, present value,
note value (denominator), numerator values, duration, and weight for this
5-year note. You are assuming here that this note pays interest only once per
year. When entering the cash payment (obviously $7) use a formula, do not just
enter a 7. Calculating the weight can be done after solving for duration and is
merely provided as a check (the weights must sum to one). Compare your answer
to the lecture slide entitled

Save your completed work for the exam.