B-Spline Modelling and Fitting the Term Structure

Abstract

For market practitioners, zero-coupon rate curves are the basic tools used to value interest-rate based instruments. Curves are built using market data such as money market rates, swap rates, interest rates futures or bond prices as inputs. Despite the name, it is not in fact the ‘zero coupon’ rates that are the most important output from a curve fitting methodology, but rather a set of quantities known as discount factors. It is these that are crucial for the pricing of interest rate-based instruments.