Term Structure Estimation

45 Pages Posted: 21 Feb 2008 Last revised: 11 Nov 2019

See all articles by Sanjay K. Nawalkha

Sanjay K. Nawalkha

University of Massachusetts Amherst - Isenberg School of Management

Gloria M. Soto

University of Murcia - Faculty of Business and Economics

Date Written: February 19, 2009

Abstract

The term structure of interest rates gives the relationship between the yield on an investment and the term to maturity of the investment. Since the term structure is typically measured using default-free, continuously-compounded, annualized zero-coupon yields, it is not directly observable from the published coupon bond prices and yields. This paper focuses on how to estimate the default-free term structure of interest rates from bond data using three methods: the bootstrapping method, the McCulloch cubic-spline method, and the Nelson and Siegel method. Nelson and Siegel method is shown to be more robust than the other two methods. The results of this paper can be implemented using user-friendly Excel spreadsheets.

Keywords: interest rates, term structure, bonds, fixed income, Excel

JEL Classification: G0, G11, G12, G13, G20, G21, G22, G23, G24

Suggested Citation

Nawalkha, Sanjay K. and Soto, Gloria M., Term Structure Estimation (February 19, 2009). Available at SSRN: https://ssrn.com/abstract=1096182 or http://dx.doi.org/10.2139/ssrn.1096182

Sanjay K. Nawalkha (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States
413-687-2561 (Phone)

Gloria M. Soto

University of Murcia - Faculty of Business and Economics ( email )

Spain

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