Mar 06

Piecewise cubic polynomial fits to yield curve - 8 min screencast

by David Harper, CFA, FRM, CIPM

FRM |

Yesterday I showed how we can use MS Excel's Solver to fit actual Treasury yields to a cubic polynomial. But a single polynomial rarely fits the entire term structure (from short Treasury bills to longer term bonds). One solution is to break the curve into pieces, and to assign each piece its own cubic polynomial. If we break the curve into three segments (0 to 10 years, 10 to 20 years, and 20 to 30 years), they are joined by two knot points:

cubicSpline2

Here is the screencast:

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