Method for Deriving Spot Rates

There are various different methods out there for the derivation of spot rates.

One of these is the so called boot strapping method where you used progressively long terms of bonds in order to work out appropriate spot artes, which are then in turn used to work out rates for later years.

Of course this gives an estimation but there are problems with this method, which are as follows:

It requires the bonds to be distributed evenly across a broad spectrum of maturity dates

It makes it harder to derive a rate the longer term you look because you need all the rates between, e.g. a ten year bond you need to look at one, two, three etc year spot rates first!

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