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Case study on bootstrapping zero-coupon and forward rates using RATE software
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Mario Melchiori
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| Mario Melchiori (Universidad Nacional del Litoral, Santa Fe, Argentina) shows the results of a case study on bootstrapping the yield curve, producing zero-coupon and forward rates from market yields. The spreadsheet shows the results of the exercise, with rates and associates discount factors along the term structure. A supplementary spreadsheet shows the UK yield curve and discount factors... |
| RATE was developed by Rod Pienaar and Moorad Choudhry. |
| RATE will calculate forward rates based on periods that coincide with the zero curve tenors or allows the user to select the length of the forward rate period (quarterly, semi-annual and annual). It is common market practice to calculate each forward period using the curve's tenor points. The calculation is: |
| (1-DF1/DF2)*1/DCF |
| Where: DF1 is the discount factor for the earlier date DF2 is the discount factor for the later date DCF is the day count factor for the tenor (e.g. Act/360). |
| In the case of the case study undertaken by Mario Melchiori and shown on the accompanying spreadsheet, the forward rate for the 3 day to 1 week period for example would be: (1-0.999671/0.999220)*(365/4)=4.11859% |
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