The Par Yield Curve


The par yield curve shows yield against time to maturity for theoretical bonds which would be priced at par to be consistent with the yields of actual instruments available in the market.

How is it used?

A par yield is the yield to maturity of a coupon-bearing bond priced at par. Clearly, it is very unlikely at any one time that there will be a bond priced exactly at par for any particular maturity. Therefore, such a bond is generally theoretical. The reason for considering such a theoretical bond, rather than yields of existing coupon-bearing bonds, is that anything else would be arbitrary. We could for example consider a range of existing five-year bonds – one with a 3% coupon, one with a 7% coupon and one with ...

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