Yield Curves

Interest Rate Curves

Interest rate curves (or projected interest rates) are not published by market participants.
However you can use the prices of market instruments to build interest rate curves.

Importance of Yield Curves

Swap valuations uses the zero coupon yield curve and forward rates.
Forward rates are used to forecast floating payments of the swap.

Relative Value Analysis

This is the process when investors compare a corporate bond yield curve to the US Treasury yield curve to determine if a bond is worth buying
All investors have a specific risk/reward profile that they are comfortable with and a bonds yield relative to its perceived risk will influence whether they buy or sell

Parallel Shift
Steepness
Curvature
Spread

Par swaps are used to construct yield curves

Factors Affecting Yield Curves

Inflation
Supply / Demand
Liquidity Desires
The most important factor affecting a yield curve is the currency in which is denominated.
The ecomonic situation in that country is also very important.

Discount Curves - extract discount rates to "value" cashflows
Old Curve - uses specific instruments and bootstrapping
New Curve - uses market observables. Define the curve using discount factors at certain dates. Fits the curve to the market

The yield to maturity of a bond is the most frequently used measure for indicating the interest rate when you hold a bond to maturity.

Important

Yields are normally measured with continuous compounding interest.
When you compare two yield curves you get a yield spread.