Bond pairs and the term structure

Antonio Diaz and Miles Livingston

Journal of Financial Research, 2024, vol. 47, issue 4, 1021-1054

Abstract: In the US Treasury bond market, the existence of a bond pair (two bonds with the same maturity but different coupons) is shown to allow the computation of the zero‐coupon interest rate for that maturity directly from the bond prices, as well as the zero‐coupon interest rates for adjacent maturity bonds with the same number of coupon payments. Since the 2008–2009 financial crisis, the number of bond pairs has increased, allowing for the direct estimation from bond prices of the zero‐coupon interest rates for an average of 180 individual maturities for bond maturities between 6 months and 30 years. The bond pairs approach outperforms popular yield‐curve‐fitting models in accurately reproducing original bond prices.

Date: 2024
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https://doi.org/10.1111/jfir.12396

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfnres:v:47:y:2024:i:4:p:1021-1054

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