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Bond pairs and the term structure

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  • Antonio Diaz
  • Miles Livingston

Abstract

In the US Treasury bond market, the existence of a bond pair (two bonds with the same maturity but different coupons) is shown to allow the computation of the zero‐coupon interest rate for that maturity directly from the bond prices, as well as the zero‐coupon interest rates for adjacent maturity bonds with the same number of coupon payments. Since the 2008–2009 financial crisis, the number of bond pairs has increased, allowing for the direct estimation from bond prices of the zero‐coupon interest rates for an average of 180 individual maturities for bond maturities between 6 months and 30 years. The bond pairs approach outperforms popular yield‐curve‐fitting models in accurately reproducing original bond prices.

Suggested Citation

  • Antonio Diaz & Miles Livingston, 2024. "Bond pairs and the term structure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 47(4), pages 1021-1054, December.
    • Handle: RePEc:bla:jfnres:v:47:y:2024:i:4:p:1021-1054
    DOI: 10.1111/jfir.12396
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