This is the reason why we need sometimes to create a yield curve out of prices of bonds issued by a specific company rather than Libor or swap rates.įor example, it is sensible to use a yield curve derived from bonds issued by Microsoft when you evaluate the intrinsic Microsoft stock price based on estimated future Microsoft dividends.
If you were to strike an obviously not very legal deal with the drug dealer – who by the way should be quite adept in striking deals by being a … dealer – involving a stream of perhaps complex and contingent future payments, you would want to take into account his reduced creditworthiness by applying a matching yield curve rather than the US treasury yield curve.
In that case, the US treasury's yield curve would imply a 10-year discount factor of 0.9 whereas the drug dealer's yield curve would imply a mere 0.5. Obviously then you would pay more money today for the US treasury promise – let's say 900 thousand - than for the drug dealer's promise - let's say 500 thousand.
So every cash flow is uncertain, but some cash flows are more uncertain than others.įor example, you may consider a promise from the US treasury for a cash payment of one million dollars in 10 years from now to be more certain than a similar promise from a New York drug dealer (or perhaps the other way around given the current US debt). There is always a chance that some exogenous event – a falling meteorite is always a sufficiently vivid example - will turn the lights off before the money gets paid. The catch is that every future cash flow – like anything scheduled to occur in the future – is not guaranteed to take place. The main use of a yield curve is that it allows us to calculate the present value of a cash flow receivable at any future time T by simply multiplying the cash flow amount with the discount factor implied by the yield curve for that time T. I will present both alternative spreadsheet interfaces to QuantLib, which are the QuantLibXL and Deriscope.įor a production-ready setup using actual Bloomberg quotes of US Treasuries, look at Bootstrapping in Excel a Yield Curve to perfectly fit Bloomberg Price/Yield Quotes of US Treasury Bills, Notes and Bonds.įor a parametric (non-bootstrapping) fit to bond prices, look at Parametric Yield Curve Fitting to Bond Prices: The Nelson-Siegel-Svensson method and Parametric Yield Curve Fitting to Bond Prices under constraints: The National Bank of Georgia case. With this article I want to show you how to create a yield curve in Excel by bootstrapping bond prices, using the open source QuantLib analytics library.
0 kommentar(er)
