Building Issuer Credit Curves Across Bond Structures

Summary

This document raises practical questions about constructing a credit curve for a single issuer, currency, and seniority class. It asks whether bullet and callable bonds should be combined, whether callable bonds with long final maturities but shorter option-adjusted durations could distort the curve, and whether maturity or option-adjusted duration is the more appropriate horizontal axis.

It also identifies comparability issues involving coupon levels, liquidity, and embedded call features, and asks whether floaters can contribute to the short end when represented with a floating-rate spread measure. These are questions rather than a proposed construction procedure: the document supplies no answers, empirical comparisons, or institutional conventions. Its value is in mapping the modeling choices and instrument differences that an issuer curve methodology must address, while leaving the preferred adjustments and curve-building method unresolved.

Key ideas

• Issuer curves should be defined for a consistent currency and seniority class.
• Callable bonds may not be directly comparable to bullets because embedded options change their rate exposure.
• Final maturity and option-adjusted duration represent different possible curve axes.
• Coupon, liquidity, and call features can affect bond comparability.
• Floaters may inform the short end if their spreads are measured against an appropriate floating benchmark.

Tags

# Issuer credit curve construction methods


# Issuer credit curve construction methods












I'm trying to understand how to properly build an issuer credit curve (e.g., for a bank or corporate) specific to a given currency and seniority level (e.g., EUR senior unsecured).

My main questions are:

- Should I construct a single issuer curve using both bullet and callable bonds, or should I separate them (e.g., use Z-spreads for bullets and OAS for callables)?

Some callable bonds have long tenors but short option-adjusted durations. Would combining them with bullets distort the curve?

- What should I use on the x-axis: final maturity or option-adjusted duration (OAD)?

For callable bonds, OAD seems more relevant to reflect actual interest rate sensitivity, but most market curves seem plotted by final maturity. What is the market convention?

- When building the curve, should I normalize for coupon differences, liquidity, or call structures? How are adjustments typically made for these comparability factors?

- Should floaters be excluded entirely, or can they be used to enrich the short-end of the curve, provided a spread-to-floating benchmark is used (e.g., ASW)?

If anyone can share a standard institutional practice or point to a robust methodology (perhaps from Bloomberg, Eikon, or internal bank practices), I would greatly appreciate it.

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