KIC000007

KIC000007 - Do we want a nice smooth curve When the curve...

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Starting Point Ideally, we want Nto equal number of days so we can price any security. If we had aprice for each day, whether it be a coupon bond or a zero, we could directly invert the discount rate for each day. Each bond is an i. Attime 0, with t to maturity. Let Pbe a vector of prices, Zavector of discount rates, and Ca matrix of coupon payments. P'(t)=C' xZ P=CxZ Z=C- l xP Regression Approach However, we typically have more than Nfor short term and lessthan Nfor long term. Cno longer is square. N rows and n < Ncolumns. n is the number of maturities P'(i') = C' X Z +&' Z = (C'xcr'C' X P 2 CURVE FITTING

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C-STRIPsOnly Will the (-STRIPS all lead to a nice smooth curve?
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Unformatted text preview: Do we want a nice smooth curve? When the curve is not smooth, what does the forward curve look like? \$0 should we assume that they absolutely correct or?- (-STRIPS quotes are slightly unreliable and some are llliquld- C-STRIPSquotes contain some excessively "rtcb" and "cheap" prices. Example C-STRIP Curves Sourte: I'l>;ed lnocme S«u,rt .. , -Bruce Tue,min, Second Edrti,," On the Run Only· Par Linear Yield Interpolation Start with the most recently auctioned. Assume trading at par linearly interpolate between yields Bootstra p the spot cu rve Fit a curve through available spots 3...
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