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I am trying to understand bond-valuation and construction of yield curve. I don't have any exposure to bootstrapping or what-so-ever as of now. So it's appreciated to have an example but not too technical (not too advanced mathematical terms - but straight forward).

In Wiki shows that yield curve has three types of rates involved.

I have seen online that some uses interpolation (non-/linear) to construct the full yield curve with tenors. And for lending and borrowing, most institutions take yield curve as the benchmark.

My questions:

  1. Why is the curve constructed using cash, future and swap rates?
  2. What are these future rates? Bond futures or interst rate futures?
  3. Cash rates plotted in the curve are directly used for lending/borrowing within institutions. What about the the futures rates and swap rates in the yield curve? Are these taken as it is or just as a reference to derive "in-house" rates?
  4. Are there risks lenders/borrowers facing by taking rates plotted in the yield curve as it is?
  5. Are there functions availabile in C# to interpolate and build full yield curve using USD-daily tresury yield curve?
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Look at the "Related" section on this page alone, and you shall find all your questions answered. QLNet provides yield curve building, bootstrapping, and related functions. –  Matt Wolf May 12 at 5:43
@MattWolf You mean QLNet has a math library that I could use in VBA and C#? Well darn it's good. It's written in C# :D –  bonCodigo May 12 at 6:10
Well, tread carefully, I have only peeked at QLNET and saw the bootstrapping and curve building functions, I have not used them. Maybe more experienced users will add more insight. –  Matt Wolf May 12 at 11:01
However to grasp and breath a bit understanding answer to my question (of title) - is it correct to accept that because yield curve doesn't come with all tenors, rates-desk or other industry players construct full curve by plugging in rates that they technically compared-proven to be the most liquid? –  bonCodigo May 12 at 11:52
Not necessarily. There are a myriad of reasons why certain instruments are used and that can change over time. Example, the libor "rigging" scandal fundamentally changed how libor curves are built at many desks. I am not a curve building expert by any means, just saying chosen instruments do not always depend on liquidity alone. –  Matt Wolf May 12 at 12:15
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