Yield Curve Introduction

The term structure of interest rates, also known as yield curve, is defined as the relationship between the yield to maturity on a zero coupon bond and the bond's maturity. Zero yield curves play an essential role in the valuation of all financial products.

The current methodology in capital markets for marking to market securities and derivatives is to estimate and discount future cash flows using rates derived from the appropriate term structure. The yield term structure is increasingly used as the foundation for deriving relative term structures and as a benchmark for pricing and hedging.