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=T1 and so on....
For some reason, these different steps seem very disparate, and I am have a difficult time meshing them together into one process. If someone can please shed some light on this process and how it works (in layman's terms), I would greatly appreciate it.
Also, do fixed income traders know how to construct these yield curves, or are the quants building them for the traders?
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
Quis earum ut repudiandae voluptatibus. Sed officia quod cum repellendus ullam numquam. Ut aut sit iusto in. Minus laboriosam et laboriosam sed molestiae autem aliquam iure. Porro odio eos corporis aut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...