Bootstrapping Discount Curves from Liquid Instruments

Summary

The note addresses how to obtain zero rates for corporate bond cash flow mapping. It recommends building a yield curve by bootstrapping from liquid market instruments, such as deposits, swaps, or futures, and then using the resulting curve for discounting. The central practical question is instrument selection: the chosen inputs determine which funding and market conditions the curve reflects.

Curve construction is described as a complex modeling task rather than a mechanical calculation. Funding costs, liquidity, and maturity can all matter, especially when constructing rates for corporate bonds. The answer offers no step-by-step bootstrap procedure, specific instrument set, or empirical comparison, and it does not explain how to account for credit spreads separately. Its main lesson is that discount rates depend on the purpose and assumptions of the curve, not just on applying a standard algorithm.

Key ideas

• Zero rates for discounting can be derived by bootstrapping a yield curve from liquid instruments.
• Deposits, swaps, and futures are examples of possible curve inputs.
• Instrument selection determines what funding and market conditions the curve represents.
• Liquidity, funding costs, and maturity complicate curve construction.

Tags

# Zero rates coupon bond calculation


# Zero rates coupon bond calculation












In order to do cash flow mapping I need zero rates for corporate bonds , where to find or how to find the o rates ?

## Answer by SmallChess (score 1)

https://quant.stackexchange.com/a/18179

This is a topic that can be covered by an entire book... Typically, you select some liquid instruments such as swaps, deposits, futures etc etc to bootstrap a yield curve, from which you can use it for discounting. The problem is not how to bootstrap, but what to bootstrap. It's a very complicated issue, you may have to consider cost of funding, liquidity, maturity etc.

Please read: A Practical Guide to Swap Curve Construction, you can find it on Google.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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