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Bootstrapping Bond Curves with Mismatched Coupon Dates

Article Quant Q&A · Author: WinSomeLoseMost
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Summary

The document raises a practical fixed-income curve-construction problem: bootstrapping forward rates from on-the-run Treasury securities when their coupon dates do not align. It describes a proposed workflow that bootstraps forwards and then applies monotone-convex interpolation, but asks how to use the resulting curve to discount cash flows on dates that differ from the instrument dates.

The examples involve securities with different coupon schedules, including month-end and mid-month dates, and notes and bonds with differing payment frequencies. No answer or method is included, so the document does not establish a best practice or provide evidence comparing approaches. Its useful contribution is identifying the need to handle exact cash-flow dates consistently in curve construction and interpolation; resolving that issue requires additional material.

Key ideas

  • Coupon dates can differ across securities used to bootstrap a Treasury curve.
  • Forward rates tied to one instrument’s dates may not directly match another instrument’s coupon dates.
  • The question proposes monotone-convex interpolation after bootstrapping forwards.
  • The document contains no answer, implementation guidance, or comparison of methods.

Tags

Fixed incomeUS marketsStatistics
Full text
# Bond Curve Bootstrapping with Exact Dates


# Bond Curve Bootstrapping with Exact Dates












I am trying to construct an OTR curve by first finding the forwards via bootstrapping and then applying Monotone Convex interpolation; however, I am stuck in the first step when I leave the textbook world of integer years.

A simple example would be a 2-bond curve, namely CT2 and CT3, which have different coupon dates (EOM vs 15th, respectively). If I obtain the forwards from CT2, I can’t really apply them to the coupons of CT3 when I discount, given they don’t fall on the same date. This problem would naturally extend when I include 10y notes and bonds since they have quarterly maturities rather than monthly.

How do I go about solving this problem? Any suggestions and/or best practices?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.