Zero-Coupon, Forward, and Par Yield Curves for the Nigerian Bond Market

Abstract

The Nigerian bond market is currently one of the most liquid in sub-Saharan Africa. Many African countries regard it as a model from which to learn and based on which to develop their respective bond markets. The developments achieved in the Nigerian bond market are of particular interest to both investors and fixed income analysts—both domestic and international. One of the important tools required for fixed income analysis, pricing, and trading is the yield curve. To the best of our knowledge, even though the Nigerian bond market has a secondary market yield curve, the yield curve is a yield-to-maturity curve, and not zero-coupon yield curve. The purpose of this study is to model the zero-coupon, par, and forward yield curves for the Nigerian bond market. We use various methods such as the piecewise cubic Hermite method, the piecewise cubic spline method (with not-a-knot end condition), the Nelson–Siegel–Svensson method, and the variable roughness penalty method. Data are obtained from the FMDQ OTC website. The results show that the piecewise cubic Hermite method is very suitable for producing the Nigerian par and zero-coupon yield curves. Our best recommended method for producing the Nigerian zero-coupon yield curve is therefore the piecewise cubic Hermite method, followed by the Nelson–Siegel–Svensson method. For the forward yield curve, the results show that the best method is the Nelson–Siegel–Svensson method, followed by the variable roughness penalty method.