maximum forward rate smoothing


maximum forward rate smoothing
An alternative yield curve smoothing technique. The most accurate yield curve smoothing method for forward rates. The yield curve with the smoothest possible forward rate function, consistent with observable data, is closely related to but significantly different from the popular cubic spline approach to the smoothing of both yields and discount bond prices. The yield curve which produces the smoothest possible forward rates consistent with given zero coupon bond prices has a quartic forward rate function which spans each time interval between observable data points. This contrasts with the cubic polynomial that is used to fit either yields or discount bond prices in the cubic spline approach. This method produces the smoothest possible forward rate curve (with f'=0 at the longest maturity) that causes the interpolated yield curve to be totally consistent with the observable data.
See smoothing. American Banker Glossary

Financial and business terms. 2012.

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