Bootstrapping a yield curve

Short-term spot rates can be derived directly from various short-term securities, such as zero-coupon bonds, T-bills, notes, and eurodollar deposits. However, longer-term spot rates are typically derived from the prices of long-term bonds through a bootstrapping process, taking into account the spot rates of maturities that correspond to the coupon payment date. After obtaining short-term and long-term spot rates, the yield curve can then be constructed.

An example of bootstrapping the yield curve

Let's illustrate the bootstrapping of the yield curve with an example. The following table shows a list of bonds with different maturities and prices:

Bond face value in dollars	Time to maturity...