Yield curves explained
About this course
Spot, par, zero rates and forwards. Bootstrap mechanics. The four classic curve shapes and what each implies. Plus practical implications for borrowing and investment decisions.
What you'll learn
- What is a yield curve?
- Curve shapes
- Spot, forward, zero
- The bootstrap
- For treasurers
Part of these pathways
Related courses
- Interest rates: foundations
- Recent global economic events
- Inflation: RPI, CPI & index-linked gilts
- Money markets primer
- Day-count conventions
- MPC, QE & gilt supply
Common questions
What is Bootstrapping?
The technique for deriving zero rates from a set of observable instrument prices (deposits, swaps, bonds). Solves for one unknown rate at a time, working out from the shortest tenor.
What is Discount factor?
The price today of receiving £1 at a future date. A discount factor of 0.96 for 1 year means £1 next year is worth £0.96 today.
What is Flattener?
Curve trade or move where the long end falls faster than the short end (or short end rises faster). Curve becomes flatter.
What is Forward rate?
The rate the market currently implies for a future window — derived from spot rates by no-arbitrage.
What is Inverted curve?
When short-term rates are higher than long-term rates. Often (but not always) signals expected future rate cuts or recession.
What is No-arbitrage?
The principle that two strategies producing identical cash flows must have the same price. If they didn't, traders would buy the cheaper and sell the dearer until prices equalised. Forward rates are derived from spot rates using exactly this logic.