Why is bootstrapping necessary to get spot rates?

Par yields are yields on coupon-bearing instruments priced at par. Spot rates are yields for a single cash flow at a specific maturity. Since coupon bonds pay cash flows at multiple dates, the coupon effect must be stripped out by bootstrapping to isolate pure time-value rates at each maturity.

What data inputs are needed for bootstrapping?

Bootstrapping requires a set of on-the-run Treasury par yields (or swap rates) at standard maturities. The 6-month spot rate equals the 6-month par yield directly. Each subsequent spot rate is solved from its par yield and all previously derived shorter spot rates.

Bootstrap Spot Rates from Par Yield Curve

Derive the zero-coupon spot rate curve from observed par yields using the bootstrap method: each spot rate is solved sequentially using previously derived shorter-maturity spot rates.

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Frequently Asked Questions

Why is bootstrapping necessary to get spot rates?

What data inputs are needed for bootstrapping?