Constructing a BBB Corporate Spot Yield Curve

Summary

The document asks how to build a spot yield curve for BBB corporate bonds from TRACE transaction data. It raises practical choices such as how many bonds and trading days to include, and whether fitting observed yields to maturity with Nelson–Siegel produces a par curve or a spot curve. It also asks whether yields to maturity should first be bootstrapped into spot rates, or whether a Treasury spot curve can be adjusted by a BBB option-adjusted spread.

The text is a question rather than a worked answer. It supplies no sample construction, bond-selection criteria, estimation results, or comparison of these approaches. Readers should treat it as a map of the methodological issues to resolve: yields to maturity are not themselves zero-coupon spot rates, and the selected instruments and spread convention affect interpretation. Further guidance is needed before using the proposed procedure for valuation or analysis.

Key ideas

• The document frames construction of a BBB corporate spot curve from recently traded bonds as a curve-estimation problem.
• It asks how many bonds and trading days should support the estimate.
• It distinguishes yields to maturity from the spot rates needed for a zero curve.
• It asks whether Nelson–Siegel fitting should be applied to yields or to derived spot rates.
• It raises a Treasury curve plus BBB option-adjusted spread as an alternative approach.

Tags

# Help Constructing a Yield Curve


# Help Constructing a Yield Curve












I want to construct a BBB spot yield curve and am trying to figure out if I am understanding the process and interpretation. Any guidance would be appreciated here.

- I first gather a list of YTM’s of BBB corporate bonds for various maturities that were recently traded say as of “April, 17th, 2025”. I am able to gather this information from the TRACE database.

- What is a good number of bonds to gather for this?

- Should I be gathering data over many trading days?

- When you plot these YTM’s are you creating a Par curve?

- Once I have this data I use a curve fitting process in my case the Nelson-Siegel model to create a smooth fitted yield curve.

- Is this creating a par curve or a spot curve?

- Do I need to covert my YTM’s first into spot rates and then use the Nelson-Siegel to get the spot yield curve?

If the above process is not correct, should I instead be creating the spot curve based on US treasuries and then adding the BBB OAS spread to that spot curve to get to a BBB spot curve?

I’ve been struggling finding resources about this so any guidance would be appreciated.

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.