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Unless all of your yields are par yields (yield of bonds trading at par), you'll get very unreliable results if you fit your curve using yields alone. This is because yields can be distorted by the coupon effect – given two bonds maturing on the same day and assuming the yield curve is upward sloping, a higher coupon bond will always have lower yield. What ...


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This is all theoretical and real life will diverge from the theory The spot rates and forward rates are linked. Spot rate for the nth period should equal the product of all the forward rates up to that period. i.e Let Spot{n} = spot rate for nth period Let Forw{k,j} = forward rate to period j at period k Let X_m be the m'th period. Then (1+Spot{n})^n =...


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You're missing something important. Sovereign credit ratings are very misleading when the sovereign can print its own money (like the UK). I would argue that every country is AAA in debt of its home currency, since its central bank can just print money to pay off the debts. There are examples when a sovereign chooses to default on its own currency, ...


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Per @dm63, these yield curves are basically smoothed curves that best fit the prices/yields of bonds traded in the secondary market. However, they reflect much more than market expectations. Refer to Deriving Interest Rates for details.


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Yes, yield curves are a pictorial representation of the current secondary market yields of government securities (gilts, in the UK). These market yields are determined largely by expectations about what the central bank will do to short term rates over time.



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