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How to Calculate a Bond Yield Curve

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A yield curve is a plotted graph consisting of interest rates, all taken at the same time, on selected maturities of bonds of a similar credit quality, usually Treasury bonds.

The standard Treasury yield curve plots the yield to maturity of 2-year notes, 5-year notes, 7-year notes, 10-year bonds, 20-year bonds and 30-year bonds.

 

4 Steps to Calculate a Bond Yield Curve

Bond Yield Curve

 

1. Find quotes on the bonds you wish to use for your yield curve.

Use a quote list that includes both the price quotes and the yields to maturity based on those prices.

 

2. Prepare your yield curve graph on the graph paper, with interest rates from zero to 10 on the vertical axis.

Then indicate the maturities along the horizontal axis, from zero to 2-year, 5-year, 7-year, 10-year, 20-year and 30-year.

 

3. Plot the yield to maturity of the current coupon bond in each maturity by placing it in the appropriate spot on your graph.

 

4. Draw a line connecting all the plotted yield points.

This is your yield curve.

 

Tips and Warnings

  • Bloomberg.com provides bid, ask and yield quotes in its bond price lists. If you only have the prices and need to calculate the yields, use one of the bond yield calculators available online and put in the “ask” price. Yield calculators will provide the most accurate answers, as the formula for computing bond yield is complex.
  • The bond yield curve will change in shape from day to day. Most professional bond traders start out the morning constructing a yield curve, which they may update during the day if the market moves enough to warrant it.

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