Government Bond Market

Usually use "on the run" treasury bills (ie zero coupon treasuries)
When government issued securities are used to construct the spot curve, it is known as: treasury yield curve.


You first have to calculate the discount factors in order to calculate the zero-coupon rates
Lets consider a 2 year bond paying an annual coupon of 10%.
This is equivalent to a 1 year zero-coupon bond paying £10
and a 2 year zero-coupon bond paying £110


Coupon Bonds

How do we construct the zero-coupon yield curve from coupon paying bonds.
We can do this using a process called Bootstrapping
Lets suppose that we have the following US Treasury Bills and Notes
The chart shows these yields plotted against their maturity dates.

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1 Year Spot Rate

We already know the 0.25 and 0.5 spot rates since these Treasury Bills are already zero-coupon bonds.
So lets calculate what the 1 year spot rate would be.
We can calculate this using a method called bootstrapping.



1.5 Year Spot Rate


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