Bootstrapping is an iterative process of generating a Zero Coupon Yield Curve from the observed prices/yields of coupon bearing securities. The process starts from observing the yield for the shortest-term money market discount instrument (i.e. one that carries no coupon). This yield is used to discount the coupon payment falling on the same maturity for a coupon-bearing bond of the next higher maturity. The resulting equation is solved to give the zero yield (also called spot yield) for the higher maturity period.

This process is continued for all securities across the time series. If represented algebraically, the process would lead to an nth degree polynomial that is generally solved using numerical methods.

Arusha Rayanswered.Bootstrapping is an iterative process of generating a Zero Coupon Yield Curve from the observed prices/yields of coupon bearing securities. The process starts from observing the yield for the shortest-term money market discount instrument (i.e. one that carries no coupon). This yield is used to discount the coupon payment falling on the same maturity for a coupon-bearing bond of the next higher maturity. The resulting equation is solved to give the zero yield (also called spot yield) for the higher maturity period.

This process is continued for all securities across the time series. If represented algebraically, the process would lead to an nth degree polynomial that is generally solved using numerical methods.