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

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Starting Point Ideally, we want N to equal number of days so we can price any security. If we had a price 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. At time 0, with t to maturity. Let P be a vector of prices, Z a vector 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 N for short term and less than N for long term. C no longer is square. N rows and n < N columns. n is the number of maturities P'(i') = C' X Z = (C'xcr'C' X P 2 CURVE FITTING
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C-STRIPs Only 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 &quot;rtcb&quot; and &quot;cheap&quot; prices. Example C-STRIP Curves Sourte: I'l&gt;;ed lnocme Su,rt .. , -Bruce Tue,min, Second Edrti,,&quot; 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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KIC000007 - Do we want a nice smooth curve? When the curve...

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