Corporate Bond Yield Curve Estimation using Parametric Approach

Although lots of literature has been discussed on the estimation of government bond yield curve, not much has been discussed on how to derive interest rate yield curve for corporate bonds. This paper first reviews the interest rate yield curve estimation methods and then discusses the probability of applying a parametric yield curve estimation approach to corporate bonds. Based on the perception of corporate bonds, it´s believed that it would be better to jointly estimate the government bonds yield curve and the corporate spread other than directly applying the approximation methods to corporate bonds. A practicable procedure to estimate the corporate yield curve is then described. After that, I use the described procedure and UK market data to calculate the corporate yield curves for the last trading days of each month in 2007.