Yield Curve Building Blocks

This unit examines the factors required to build accurate yield curves to help traders, investment advisors and salespeople to price up, sell and revalue various interest rate derivatives. It will discuss not only the reasons for different yield curves but also will show that although very different in structure and use, they are all based on the same foundation. Accurate yield curves based on the current term structure of interest rates are absolutely essential for the trading and sales of interest rate derivatives. The value of any stream of cash flows is not the sum of the actual cash flows themselves but the present value of the cash flows. With a consistent method of calculating these present values, the results can be used to compare today’s value of different multi-payment assets and liabilities. To do that, specific yield curves are used to build an accurate, appropriate model.