Curve Construction (Bootstrapping)¶
One-line definition¶
Deriving a zero (spot) rate curve from observed par yields.
Method¶
For consecutive annual-pay par bonds, solve maturities shortest-to-longest: already-known zero rates discount the earlier coupons, and the equation is solved for the new zero rate at each new maturity.
Why PMs care¶
Zero rates, not par yields, are the correct discount rates for pricing arbitrary cash flows and computing forward rates.
Limitations¶
bootstrap_zero_rates in src/pm/fixed_income/curve.py only handles
consecutive integer-year, annual-pay tenors. A real curve build needs
semiannual coupons and interpolation for sparse/off-cycle tenors
(e.g. 2Y/5Y/10Y/30Y) — see interpolate_zero_rate for the latter.