Analyzing Interest Rate Curves

Yield Curve Analytics with Python

We come across the term benchmark yields that is quoted in every financial daily on a regular basis. What exactly does this term mean?. Benchmark yield is the bond yield that is quoted by the market on the sovereign/government bonds trading in that market. It’s called as the benchmark owing to the fact that this is for a sovereign bond with specific maturity (generally 10Y). This yield is like a proxy yield that is used by investors to get a sense of the interest rates in the economy. Investors closely track this yield as it helps them to decide on taking an investment action. Now, just like 10Y yield, there are sovereign securities with other maturities that are traded in the market. For instance, there may be sovereign securities for tenors like 90 days, 180 days, 1 year, 2 year and so on. Generally, securities below 1Y maturity are termed as treasury notes, whereas those with maturity above 1Y are termed as treasury bonds. The yields quoted on such traded bonds are called the YTM i.e. yield-to-maturity. YTM as a yield measure has a few shortcomings which calls for the use of a few analytical techniques to extract additional information that may be used for various financial applications including pricing, modelling etc. In the first part of this post we will discuss an analytical technique widely used by financial market participants. In the subsequent part of this post we will discuss how this technique is implemented in Python.

Founder: FinQuest Institute;

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