What Treasury issues can be used to construct the theoretical spot rate curve?
What will be an ideal response?
A default-free theoretical spot rate curve can be constructed from the yield on Treasury securities. The Treasury issues that are candidates for inclusion are (i) on-the-run Treasury issues, (ii) on-the-run Treasury issues and selected off-the-run Treasury issues, (iii) all Treasury coupon securities, and bills, and (iv) Treasury coupon strips.
After the securities that are to be included in the construction of the theoretical spot rate curve are selected, the methodology for constructing the curve must be determined. If Treasury coupon strips are used, the procedure is simple, because the observed yields are the spot rates. If the
on-the-run Treasury issues with or without selected off-the-run Treasury issues are used, a methodology called bootstrappingis used.
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a. true b. false
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