Research On The Construction Of Yield Curve

The basic of bond market trading is the pricing, i.e. the valuation of the bond. The essential of bond valuation is to calculate the present value of the bond’s future cash flows based on the relationship between the remaining time and yield rate(yield curve).Consequently, how to explore real information from the market and how to construct appropriate yield curves become an extremely important basic work.For the past few years, the bond market in China has greatly developed, but compared to European bond market which has over one hundred year’s history, our bond market is not that mature with regards to trading rules, product development and risk management, etc., especially there remain a number of problems relating to the construction of the yield curve to be solved.This paper firstly introduces the sketch of bond market in China together with the importance of bond valuation, and discusses the meaning and impact of constructing reasonable yield curves from the angles of investment decision and risk management. In this part, current research status is reviewed and this paper’s main problems will be disclosed.Secondly, this paper introduces two basic methods in both theoretical and practical ways to construct yield curves, per static and dynamic status, and it discusses advantages and disadvantages of these models via verifications with proof.Finally, this paper puts forward some questions and considerations while constructing yield curves in practice, including the discussion on the assessment standards of yield curves, and the analysis of China bond yield curves which are the most influential in the market. It also tries to research term structure valuation in the circumstance of data exception and shortage, raises Yield Spread Method and Panel Method, these two operational solutions and performs verifications.