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Modelling the Yields on Australian Coupon Paying Bonds



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.

Suggested Citation

  • Ben Hunt, 1995. "Modelling the Yields on Australian Coupon Paying Bonds," Working Paper Series 50, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:wpaper:50

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    References listed on IDEAS

    1. Vasicek, Oldrich A & Fong, H Gifford, 1982. " Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-348, May.
    2. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
    3. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
    4. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
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    Cited by:

    1. Christopher M. Bilson & Timothy J. Brailsford & Luke J. Sullivan & Sirimon Treepongkaruna, 2008. "Pricing Bonds in the Australian Market," Australian Journal of Management, Australian School of Business, vol. 33(1), pages 123-143, June.
    2. Ben Hunt & Chris Terry, 1998. "Zero-Coupon Yield Curve Estimation: A Principal Component, Polynomial Approach," Working Paper Series 81, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Juan Camilo Santana, 2008. "La curva de rendimientos: una revisión metodológica y nuevas aproximaciones de estimación," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID, July.

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