6 - Yield Curve Interpolation

Question 1

Explain the Straight Line on Zeros Curve building method…

Answer 1

Straight Line or linear interpolation on zeros assumes that any rate lying between two observed zero coupon yield points will lie on a straight line between these two points.

Question 2

What are the advantages/disadvantages of interpolation?

Answer 2

Adv - Simplicity
- Ease of Calculation
Disadv - The Yield Curve is not Smooth