Direct Extracting the Implied Forward Yield Curve from the Coupon Bond Prices

Abstract

It is developed the analytical approach based on the future value concept to directly extract the forward yield curve from the fixed coupon-bearing bond prices. It meets the next no-arbitrage condition: the rates of return on zero-coupon and coupon bonds with the same maturities should be equal. It is shown that there are the essential differences between the estimates of yield curves obtained by the direct and indirect methods. It is suggested to employ only direct methods to extract the spot and forward yield curves: the spot yield curve is directly extracted using the present value concept, and at the same time the forward yield curve is directly extracted using the future value one. It is shown that there is a complementary set of forward rates meeting the no-arbitrage condition side by side with a set of forward rates defined by standard approach.