Zero coupon rate

Overview

The Zero coupon rate analysis uses the Libor Market model to construct zero coupon rates at different maturities. Such rates can typically not be observed directly on the market except for short deposit rates. Longer rates are then constructed based on the shorter rates by using FRAs and swaps since these are typically readily available. The basic idea is that you start with a short rate and then use a chain of FRAs to construct the medium rates and finally a chain of swap for the long rates.

Settings

Output series

Define the maturity of the rate you would like to calculate by providing a value in the maturity text box. To add another rate, simply click the add series button. For each series you may add a description.

Prefer before previous

When selected it means that series from that category will be used when there is an overlap of maturity lengths.

Epochs

Here you define which series to use for calculating each segment of the swap curve. The series added in the series list will initially be located at the bottom of the window as unclassified series. To place the series in the desired category, simply highlight the series and select the type. You also need to set a start time for the epoch.

Deposit rates

Here, interbank deposit rates should be located. You have the option of using automatic or custom maturity settings. The custom settings allows you to choose maturity, define an offset and specify the rate type.

FRA-IMM rates

For the middle part, FRAs needs to be added. By choosing the custom maturity setting, you can modify the position and the offset.

Swap rates

Finally, for the long end of the curve, Swap rates should be added. The custom settings allows you to choose maturity and define an offset.

Example

Zero coupon rates: Norway

In our example, we created zero coupon yield using series with different maturities for Norway. Then we combined the results with the Yield Curve analysis