1. Bootstrapping
Dr. Himanshu Joshi

2. What is Bootstrapping? Par Rates:
One year par rate =5%, two year par rate = 5.97%, three year par rate = 7.81%. From these we can bootstrap zero coupon rates.
One year zero coupon rate is the same as the one year par rate because, under the assumption of annual coupons, it is effectively a one year pure discount instrument.
However, the two year bond and later maturity bonds have coupon payments before maturity and are distinct from zero coupon instruments.

3. What is Bootstrapping?
The two year zero coupon rate is determined by solving the following equation in terms of one monetary unit of current market value using information the r(1) = 5%.
1 = /(1.05) /(1+r2)2
in the equation, and represent payments from interest and principal, respectively, per one unit of principal value.

4. What is Bootstrapping?
The three year zero-coupon rate can be bootstrapped by solving the following equation, using the known values of the one year and two year spot rates of 5% and 6%.
1 = /(1.05) /(1.06) /(1+r3)3
Four year zero-coupon rate:
1 = / /(1.06) /(1.07) /(1+r4)4