Choosing Coupon Frequencies When Bootstrapping Spot Rates

Summary

The document asks how to bootstrap spot rates from a yield curve with maturities that become more frequent at the short end. It considers treating the one-month yield as a spot rate, using discount factors to derive later maturities, and deciding whether to preserve monthly cash flow assumptions or restart at three months with a new coupon interval.

It gives no resolution or worked calculation, so it does not establish which approach is correct. The key issue is that a quoted yield curve alone does not specify the underlying instruments’ cash flows, coupon schedules, or conventions. A practical bootstrap needs those details, along with compatible day-count and compounding assumptions; maturity labels by themselves do not determine coupon frequency. The question is useful as a prompt to distinguish market yield quotes from the instrument cash flows required to infer discount factors.

Key ideas

• Bootstrapping spot rates requires discount factors derived from instrument cash flows.
• Yield curve maturities alone do not specify coupon schedules or payment conventions.
• The document raises, but does not resolve, how to handle changing maturities at the short end.
• A consistent bootstrap depends on assumptions about coupons, compounding, and day-count conventions.

Tags

# What coupon frequencies should I assume for bootstrapping spot curve from yield curve?


# What coupon frequencies should I assume for bootstrapping spot curve from yield curve?












I found this post that pretty well explains how to transform a yield curve to a spot curve. Now I'm trying to apply this to a "real" yield curve that I downloaded via the FRED Api. In the mentioned post they used an easy example with only three points at 1Y, 2Y and 3Y. For this example it is straightforward to assume annual coupon payments. However, the FRED data comes with datapoints at 1M, 2M, 3M, 6M, 1Y, 2Y,....

For 1M and 2M it is straightforward too I think. The 1M yield rate is equal the spot rate. Then you could use this discountfactor to derive the DF for 2M, assuming that the PV is at par. But how should I move on with 3M and 6M. Is it right to keep the monthly coupon payment then for all maturities (i.e. using the 1M and 2M DF to derive the 3M DF) or should I start over and take the 3M yield rate again as the 3M spot rate and assume quarterly coupon payment for 6M (i.e. using only the 3M DF to derive the 6M DF)?

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