User FAQs

1) What is Curve Building ?
This is the process of extracting market information to find out what the market consensus thinks about projected interest rates.

2) What is Bootstrapping ?
This is a method that can be used for curve fitting.

3) Bootstrapping can be split into two categories
Exact Methods - market rates can be replicated exactly but need assumptions on the interpolation
Non-Exact Methods - requires calibration/testing and then needs to be checked for consistency / validated

4) When people say Yield Curve which yield curve are they probably referring to ?
They are most likely talking about the Spot Yield Curve.

5) What is the Treasury Spot Curve ?
This is a Spot Curve that has been constructed using Treasury Securities.

6) What is the Spot Yield Curve ?

7) What is a Spot Curve used for ?

8) What is the Forward Yield Curve ?

9) What is a Forward Curve used for ?

10) What is the equation (or relationship) that connects spot rates and forward rates ?
Fabozzi, pg 134

11) What is the Swap Curve ?

12) What is a Swap Curve used for ?

13) What is an Inverted Yield Curve ?

14) If the spot rate for a Treasury Bill with a maturity date in 3 months time (91 days) is 8.91%, what is its price today ?
The yield to maturity for zero coupon bonds is referred to as the spot rate, so Yield to Maturity is 8.91
The face value of a Treasury Bill is $1,000,000
The day count convention is Actual/360
price = 1000000 / (1 + (8.91/100))^(91/360) = $978,656.1

15) I am receiving £100 in 6 months time, How much is that worth today ?
You can calculate this using the Spot Curve.

16) I need to pay £100 in 6 months time. How much is that worth today ?
You can calculate this using the Forward Curve.

17) Once we get the Swap Curve we can infer all the other curves
You can infer the Spot Curve and Forward Curve from the Swap Curve

18) If the spot rate for a Treasury Bill with a maturity date in 6 months time (182 days) is 11.56%, what is its price today ?
price = 1000000 / (1 + (8.91/100))^(182/360) = $946,197.5

19) What is the annualized bank discount yield for this 6 month Treasury Bill (expressed as a decimal) ?
Treasury Bills are traded in the secondary market, and are quoted based on their bank discount yield.
This is the approximate annualized return the buyer should expect when holding to maturity.
discount yield = (dollar discount from face value / face value) * 360 / (days until maturity)
discount yield = (946,197.5 / 1,000,000) * (360/182)
discount yield = 1.8716 %

20) Can you describe the term Holding-Period Yield ?

21) Can you describe the term Effective Annual Yield ?
Also known as Effective Interest (Quant page)
This converts an interest rate to an interest rate that is compounded every year.
This allows investments that have different compounding frequencies to be compared.