Chapter

Extracting Yield Curves from Bond Prices

Claus Munk

in Fixed Income Modelling

Published in print June 2011 | ISBN: 9780199575084
Published online September 2011 | e-ISBN: 9780191728648 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199575084.003.0002
Extracting Yield Curves from Bond Prices

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The clearest picture of the term structure of interest rates is obtained by looking at the yields of zero-coupon bonds of different maturities. However, in most countries almost all traded bonds are coupon bonds, not zero-coupon bonds. This chapter discusses methods to extract or estimate a zero-coupon yield curve from the prices of coupon bonds at a given point in time. In the U.S. and some other countries, zero-coupon bonds can be traded, but for various reasons most analysts and dealers prefer to work with a zero-coupon yield curve extracted from the prices of the coupon bonds. The methods discussed in the chapter are bootstrapping, cubic splines, and the Nelson–Siegel parameterization.

Keywords: zero-coupon bonds; yield curve; arbitrage; bootstrapping; cubic splines; Nelson–Siegel parameterization

Chapter.  6073 words.  Illustrated.

Subjects: Financial Markets

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