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Bootstrapping Zero-Coupon Rates from the Yield Curve

Bootstrapping Zero-Coupon Rates from the Yield Curve

After a short motivation of the term structure of zero-coupon rates, the article describes how to derive the zero-coupon rates from quoted instruments with different maturities. The focus is on semi-annually compounded zero-coupon rates due to their popularity on major financial markets (e.g. USA, U.K., Canada). The bootstrapping technology is described in general (gradual extension of the maturity of the respective instrument used). Afterwards, the article concentrates on bootstrapping from coupon bond prices and from par coupon rates (like constant maturity treasury yields or swap rates). For both methodologies, the bootstrapping procedure is illustrated by means of a numerical example.