Yield Curve

In this Excel Library video, we take a limited amount of bond yield information, and then extrapolate and interpolate from this a good-fitting yield curve which covers all the ‘potential’ rates in-between.

We do this using the Nelson-Siegel-Svensson method, via the Excel data tool, Solver, and minimise residual error squares to create a believable yield curve, despite a lack of complete information.

The main Nelson-Siegel-Svensson block of code used in this video can be copied from the section below:

=(Beta1)+
(Beta2*((1-EXP(-A2/Lambda1))/(A2/Lambda1)))+
(Beta3*((((1-EXP(-A2/Lambda1))/(A2/Lambda1)))-
(EXP(-A2/Lambda1))))+
(Beta4*((((1-EXP(-A2/Lambda2))/(A2/Lambda2)))-
(EXP(-A2/Lambda2))))

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In today’s lecture, we examine the ‘special’ yield curve known as the ‘riskless’ yield curve and how we define it and its terms.

Once we have this special yield curve defined, we then talk about credit spreads, which are essentially the difference in yields between bonds of the same maturity, particularly as compared to the riskless yield curve.

The full YouTube playlist of Securities Investment 101 lecture videos can be found by clicking here.

Please read our disclaimer.

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The Inverted Yield Curve, Lecture 016, Securities Investment 101

June 19, 2013

In this lecture we describe the inverted yield curve and how it differs from the normal yield curve. Before we get to that, we explain the strategy of ‘riding the yield curve’ and then why the inverted yield curve is such a dangerous thing when riding the yield curve. We explain why the inverted yield […]

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The Yield Curve, Lecture 015, Securities Investment 101

June 17, 2013

In this lecture, we introduce the yield curve, which lies at the base of most cashflow trading. We explain liquidity preference theory, which determines the typical ‘standard’ shape of the yield curve, and how risk and reward, measured by credit risk and opportunity risk, create the standard yield curve. It must be noted, however, that […]

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