Module 34.1 LOS 34.c: Bootstrapping Spot Rates

We can derive spot rates from the par rate curve through a process called bootstrapping. Bootstrapping is in iterative process that uses the output of one step as the input to the next. Bootstrapping works on the basis that the one year par rate is the same as the one year spot rate. Using S1 we can compute S2. And with S2, we can compute S3, so forth, using the following equation:

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