LIBOR Curve Bootstrapping and Internal Rate Conventions

Summary

The document addresses whether simple LIBOR quotations must be converted to compounded rates before bootstrapping a yield curve. The answer depends on how the curve is represented internally: if the chosen representation uses compounded rates, conversion is needed. The central objective of bootstrapping is to construct a curve that reprices the market instruments used as inputs, such as deposits, futures, swaps, and overnight indexed swaps.

The discussion also notes that modern curve construction commonly uses multiple curves, including one for discounting cash flows and separate curves for projecting rates at different tenors. It offers a practical principle rather than a worked conversion or bootstrapping example. The appropriate conventions therefore depend on the instruments, curve representation, and multi-curve setup being implemented.

Key ideas

• Convert quoted rates when the internal curve representation requires a different compounding convention.
• A bootstrapped curve should reprice the instruments used as its market inputs.
• Curve construction may use separate curves for discounting and tenor-specific rate projection.
• The rate convention is an implementation choice constrained by instrument conventions and repricing requirements.

Tags

# LIBOR Curve bootstrapping and compounding


# LIBOR Curve bootstrapping and compounding












I am currently reading about swap pricing based on using the LIBOR curve to calculate spot rates, forward rates, and discount rates. From what I understand LIBOR is quoted as a simple interest rate based on the date time convention. Thus should these rates first be converted to compounded rates before continuing with bootstrapping?

## Answer by alexprice (score 2, accepted)

https://quant.stackexchange.com/a/50497

It all depends on how you want to represent your yield curve internally. If you choose to use compounded rates as internal yield curve then yes you would need to convert.

All you care about in curve bootstrap is that you want to reprice exactly the instruments you use as input (usually being Libor deposit rates, forward rates, futures, swaps, OIS, basis swaps etc) . Notice that you will usually need to use more than 2 internal curves (one for discounting cashflows based on OIS and one for projecting for each tenor).

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