Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Modelling the Yields on Australian Coupon Paying Bonds
Author(s): Ben Hunt
Date of publication: September 1995
Working paper number: 50

Before coupon bond data can be used to make term structure inferences it must be adjusted to account for the coupon effect. This paper compares the performance of two alternative adjustment methods, namely a duration based adjustment of term and a zero coupon method that adjusts yields. The comparison of the two adjustment methods was carried out on unique data set on Australian traded bonds.

The duration adjustment method models coupon bond yields as a function of duration and convexity. The estimation results indicated that despite the apparent attractiveness of high convexity to bond holders that convexity was not a significant determinant of yields. In making the zero coupon adjustment we employed a simple polynomial functional form for the zero coupon yield curve. This method, not only provided a good fit to the data, but also produced a plausible implied zero coupon forward rate curve and a zero coupon volatility structure.

It was concluded that while the zero coupon method of adjusting coupon rates may be slightly more complex to implement, it was preferred because, it provided a slightly better estimate bond prices and yields, and as expected, it gave a very much better estimate of spot zero coupon rates that in tum could be used to provide zero coupon forward rate and volatility estimates.

Paper: Download (Format: PDF, Size: 1.0 Mb)
Known citations:

Bilson, C. M., Brailsford, T.J., Sullivan, L. J. and Treepongkaruna, S. 2008, "Pricing Bonds in the Australian Market", Australian Journal of Management, 33(1), 123-143.

Hunt, B. and Terry, C., 1998, "Zero-Coupon Yield Curve Estimation; A Principal Component, Polynomial Approach", Working Paper: 81, Finance Discipline Group, University of Technology, Sydney.

Kalev, P. S., 2001, Rational Expectations and the Term Structure of Interest Rates, PhD Thesis, Monash University.

Kalev, P. S., 2004, "Estimating and Interpreting Zero Coupon and Forward Rates: Australia, 1992-2001", Working Paper.

Marrero, S. M., 1998, Estimación de la estructura temporal de tipos de interés. Propuestas alternativas, Doctoral Thesis, University De La Laguna.

Santana, J. C. 2008, "La Curva de Rendimientos: Una Revisión Metodológica y Nuevas Aproximaciones De Estimación", Revista Cuadernos de Economía,, 27(48), 71-113.