Vasicek Model Parameters

t
r0

2.000%

T
a
b

dr

5.000
1.075
3.939%
2.405%
#MACRO?

see formula

Market Pric
Price
12
10
8

t
r
T
a
b

dr

Price

CIR Model Parameters

0
6%
5
6.5
5%
10%
#MACRO?

Name

Maturity

01M
02M
03M
06M
09M
12M
1049
1047
1043
1048
1041
1046
1045
1040
1037
1034

2007/01/04
2007/02/03
2007/03/05
2007/06/03
2007/09/01
2007/11/30
2015/08/12
2020/12/01
2009/01/28
2009/12/01
2014/05/05
2012/10/08
2011/03/15
2008/05/05
2007/08/15
2009/04/20

6
4
2
0
0

Next Coupon Settlement

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2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30
2006/11/30

YTM
2.000%
2.000%
2.000%
2.160%
2.275%
2.415%
3.875%
3.875%
3.250%
3.430%
3.810%
3.730%
3.605%
3.030%
2.685%
3.345%

Coupon(c)

Price

0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
4.50%
5.00%
5.00%
4.00%
6.75%
5.50%
5.25%
6.50%
8.00%
9.00%

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Formulas CIR Interest Rate Model

Interest rate process:

dr=a ( br ) dt+ rdz

with constants
b: long-term equilibrium of mean reverti
a: "pull-back" factor - speed of adjustm
: spot rate volatility

Value of zero=coupon bond:

with

dz standard Wiener process

P( t , T )= A ( t , T )eB( t , T )r (t )

B (t , T )=

2(e

(Tt)

1 )

( +a ) ( e (Tt) 1 ) +2

A ( t ,T )=

2 e

( a+) ( Tt )/ 2

( +a ) ( e (Tt )1 ) + 2

2 ab / 2

Long-term distribution of r (Steady State Probability Density Function) is gamma distributed

2a
k
2
2 a k1 2 ar / 2ln ( ( k ))
k1 2 ar / 2
P=
r e
= 2 r e
(k )

2 ab
with k = 2

( )

( )

(.)

is Gamma Function
Excel worksheetfunction is GAMMALN(.) wh

Mean & standard deviation gamma distribu

( Mean ) =k
=b
2a
2
b
( Stdev )= k
=

2a
2a

Gamma distribution in Excel notation

1
(
)
f x, , =
x 1 ex/
( )

with
= k
= (2)/2a

Infinitely-long
Rate (Y of zero rate Y(t,T)
CIR volatitility

Y =

2 ab

( a+ )

back to top

B(t ,T )
Y ( t , T )) = r 0
( T t )

where r0 spotrate at t=0

a: "pull-back" factor - speed
: spot rate volatility

Market Price & Model Price

Price

Model Price

10

12

14

16

Time

Clean Price Model Price

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#MACRO?
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Error
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###

rm equilibrium of mean reverting spot rate process

ack" factor - speed of adjustment
te volatility

Time
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18

d Wiener process

( a+) ( T t )/ 2

( e (T t )1 ) + 2

2 ab / 2

mma Function
sheetfunction is GAMMALN(.) which LN of (.)

ndard deviation gamma distribution

an ) =k
=b
2a
2
b
ev )= k
=

2a
2a

where r0 spotrate at t=0

a: "pull-back" factor - speed of adjustment
: spot rate volatility

Parameters of CIR Term Structure

t
r0

0r
2.000% B
5.000 A
5.000 Y
6.000% discount factor
10.000% zero coupon rate
0.002777778 zero coupon vol()
solution with VB

T
a
b

dr

5.0019996

Periods

0.19996002
0.74980207
0.059988
0.74680944
0.05838904
0.00056557
#MACRO?

0.001
0.5
1
2
3
4
5
6
7
8
9
10
15
20
25
30
35
40
45
50

Long Term Distribution

r
K
P

0.06
60
51.431745
6.000%
0.00774597

Spot Rates
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5

0.02514315
0.02901613
0.03288912
0.0367621
0.04063508
0.04450807
0.04838105
0.05225403
0.05612702
0.06
0.06387298
0.06774597
0.07161895
0.07549193
0.07936492
0.0832379
0.08711088
0.09098387
0.09485685

Probability
3.6576869E-006
0.0003565845
0.0120363509
0.1782451084
1.3663188313
6.1129902562
17.4660795527
34.1513067713
48.246780497
51.4317449903
42.8555502444
28.7342659373
15.882199157
7.3854784636
2.9397902071
1.0166267096
0.3093663579
0.0837691564
0.0203808865

A
1
0.981195
0.953063
0.897643
0.845379
0.796158
0.749802
0.706145
0.665031
0.62631
0.589843
0.5555
0.411549
0.304902
0.22589
0.167354
0.123986
0.091857
0.068053
0.050418

Probability Distribution
60
50
40
30
20
10
0
0.02

0.03

0.04

0.05

0.06
Probability

0.07

0.08

0.09

10
0
0.02

0.03

0.04

0.05

0.06

0.07

0.08

Probability

spot rates, forward rates and YTM

0.18
0.16
0.14
spot rates

0.12
0.1
0.08
0.06
0.04
0.02
0
0

10

20
spot rates

30
maturity
forward rates

40

50
YTM

0.09

Discount F Zero Coupon Spot Rates Forward Rates

0.007127
0.061908
0.169047
0.199714
0.199958
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996
0.19996

0.9998573271
0.9799812995
0.949845812
0.8940649663
0.8420051219
0.7929800496
0.7468094445
0.7033270847
0.6623764491
0.6238101304
0.5874893035
0.5532832266
0.4099068793
0.3036846982
0.2249886513
0.1666856892
0.123491202
0.0914900195
0.0677815386
0.0502168106

0.1426830548
0.0404435793
0.0514556108
0.0559884186
0.0573230606
0.0579893039
0.0583890442
0.0586555376
0.0588458901
0.0589886544
0.0590996933
0.0591885245
0.0594550179
0.0595882646
0.0596682127
0.0597215114
0.0597595818
0.0597881347
0.0598103425
0.0598281087

0.1533641905
0.0412725587
0.0528024522
0.0575854353
0.0589978756
0.059703661
0.0601273518
0.0604099065
0.0606117773
0.0607632057
0.0608809982
0.0609752417
0.0612580223
0.0613994409
0.0614843011
0.0615408783
0.0615812925
0.0616116041
0.0616351804
0.0616540418

ty Distribution

0.1533641905
0.0410592355
0.0644600148
0.0623901481
0.0618284178
0.0618238407
0.0618238099
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097
0.0618238097

Discount Function

1.2

Discount Facotors

0.06
Probability

0.07

0.08

0.09

0.1

0.8
0.6
0.4
0.2
0
0

10

Yields

20

30
maturity

40

50

0.2
0.06

0.07

0.08

0.09

0.1

Probability

10

Yields

20

30

40

50

maturity

Zero Coupon Yield

0.16
0.14
zero coupon rate

0.12
0.1
0.08
0.06
0.04
0.02
0
0

10

20

30
period

40

50
YTM

60

40

50
6
Zero Coupon Rates

40

50

60

40

40

50

60

50
60
Zero Coupon Rates