ECON300822

In this part, we will use the Australian Government Bond market data found in this file on the ASX website. In order to interpret this data, you may also wish to refer to the AGB Fact Sheet. In particular, you will need to consider accrued interest when interpreting the bond prices in the data file.
Task 1:
Based on the prices for fixed rate Australian Government Bonds in the column marked "last", determine the term structure of zero coupon bond prices that these prices imply, using loglinear interpolation where necessary. (6 marks)

Task 2:
Consider the Nelson/Siegel term structure parameterisation introduced in the lectures. Find the Nelson/Siegel parameters such that the sum of squared differences between the bond prices implied by the Nelson/Siegel term structure and the actual market prices of the fixed rate Australian Government Bonds in the column marked "last" is minimised. (8 marks)

Task 3:
Plot the term structure of instantaneous forward rates resulting from Task 1 and Task 2 in a single graph. (1 mark)