 future time interval. . The usefulness of bootstrapping is that using only a few carefully selected zero-coupon products, it becomes possible to derive par swap rates (forward and spot) for all maturities given the solved curve. This article is one part of a series on fixed income portfolios. The first step in the formula is to convert the APY to an APR. The terms Term Structure of Interest Rates and Yield Curves intimidates most MBA students. . Occasionally, the yield curve can have a negative slope; this tends to happen when inflation is at unusually high levels and is expected to fall in the future.

This causes the yield curve to be steeper than it would be under the Expectations Theory. Spot rates can be computed from discount factors; forward rates can be computed from spot rates. 1) Introduction: Term Structures, Interest Rates and Yield Curves. So, this formula results in either. This value is increased by one for each day; for example, 2 January 2, 1900. . Linear interpolation ) will always be required. 1, a bootstrapped curve, correspondingly, is one where the prices of the instruments used as an input to the curve, will be an exact output, when these same instruments are valued using this curve. This is another useful tip I would like to give you.

Discount factors may be computed from the prices and coupons of Treasury securities. . When the six month bond matures, it will pay one final semi-annual coupon along with the bonds principal or face value of 1,000.

These numerical values may be used for settlement and maturity. We then use these rates to calculate the.5 year spot rate. Not to be confused with, bootstrapping (corporate finance). D(1) d(1) 968.0976/1007.961368 Using this same approach: d(1.5).928366 d(2) .882386 These results can be confirmed by pricing the 24 month bond using these discount factors, as follows. . For the twelve month,.40 coupon bond, the yield is computed as: yield(settlement, maturity, rate, pr, redemption, frequency, basis) yield(1/1/16, 1/1/17,.4,.5, 100, 2, 0).039748.9748 For the eighteen month,.20 coupon bond, the yield is computed as: yield(settlement, maturity, rate, pr, redemption. 1.5 year bond selling at Par, coupon.5, semi-annual. If you have questions or need help understanding the concept of term structure, how interest rates can be used or yield curves, please feel free to call or email our corporate finance tutoring team and one of our CFA or MBA tutors will be happy to assist you with.