when the yield curve is plotted using data on the yield and maturities of on the run treasuries it is referred to as an interpolated yield curve or i curve on the run treasuries are the most recently issued u s treasury bills notes or bonds of a particular maturity 1
conversely off the run treasuries are marketable treasury debt consisting of more seasoned issues the on the run treasury will have a lower yield and higher price than a similar off the run issue and they only make up a small percentage of the total issued treasury securities interpolationinterpolation is simply a method used to determine the value of an unknown entity treasury securities issued by the u s government are not available for every period of time for example you will be able to find the yield for a 1 year bond but not a 1 5 year bond to determine the value of a missing yield or interest rate to derive a yield curve the missing information can be interpolated using various methods including bootstrapping or regression analysis once the interpolated yield curve has been derived yield spreads can be calculated from it as few of the bonds have maturities comparable to those of the on the run treasuries because yield curves reflect the bond market s opinion of future levels of inflation interest rates and overall economic growth investors can use yield curves to help them make investing decisions bootstrappingthe bootstrapping method uses interpolation to determine the yields for treasury zero coupon securities with various maturities using this method a coupon bearing bond is stripped of its future cash flows that is coupon payments and converted into multiple zero coupon bonds typically some rates at the short end of the curve will be known for rates that are unknown due to insufficient liquidity at the short end you can use inter bank money market rates to recap first interpolate rates for each missing maturity you can do this using a linear interpolation method once you have determined all the term structure rates use the bootstrapping method to derive the zero curve from the par term structure it is an iterative process that makes it possible to derive a zero coupon yield curve from the rates and prices of coupon bearing bonds special considerationsseveral different types of fixed income securities trade at yield spreads to the interpolated yield curve making it an important benchmark for example certain agency collateralized mortgage obligations cmos trade at a spread to the i curve at a spot on the curve equal to their weighted average lives a cmo s weighted average life will most likely lie somewhere within the on the run treasuries which makes the derivation of the interpolated yield curve necessary 