Bootstrapping the zero yield curve
I am not trying to create a zero yield curve, but would like to have a better understanding of how the process works when bootstrapping a yield curve with a cubic spline. I understand that you collect diffferent yields from a variety of securities (deposits, eurodollar futures, etc) in order to extract the discounts and then use the bootstrapping method to calculate the prices of securities in ascending order. My confusion stems from how the cubic spline interpolates this information. I do not understand how the following can calculate the zero coupon yields:
a0T3 + b0T2 + c0T + d0 for 0
This is a pretty elegant extrapolation of a cubic spline to flatten a yield curve as it relates to zero-coupon bonds:
http://bit.ly/ddNy6G
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