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Mastering Python for Finance by James Ma Weiming

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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 corresponding to the coupon payment date. After obtaining short-term and long-term spot rates, the yield curve can then be constructed.

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 in years

Annual coupon in Dollars

Bond cash price in Dollars

100

0.25 ...

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