Bond Pairs and the Term Structure
J Financ Res. 2024;1–34.
34 Pages Posted: 2 Oct 2024
Date Written: January 12, 2020
Abstract
In the US Treasury bond market, the existence of a bond pair (two bonds with the same maturity but different coupons) is shown to allow the computation of the zero-coupon interest rate for that maturity directly from the bond prices, as well as the zero-coupon interest rates for adjacent maturity bonds with the same number of coupon payments. Since the 2008-2009 financial crisis, the number of bond pairs has increased, allowing for the direct estimation from bond prices of the zero-coupon interest rates for an average of 180 individual maturities for bond maturities between 6 months and 30 years. The bond pairs approach outperforms popular yield-curvefitting models in accurately reproducing original bond prices.
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