The rationale of par rate curve

CFA Level II Fixed Income
#1

Hi ,

I am not quite understand the rationale why we must use bonds priced at par in order to derive the par yield curve before we derive the other curve like spot curve / forward curve.

Why can’t we simply pick a sample of treasury bonds (or bonds deemed to be risk free), no matter it is priced at par or not, and use their average yield to maturity to build a yield curve ? Seems this way could get more data when constructing the yield curves without filtering out.

Can someone share you thought on the rationale behind why bond priced at par must be used when constructing the yield curve before getting the spot curve ?

Many thanks.

#2

You don’t have to use bonds priced at par to build the par curve; you can use any bond’s YTM.

#3

Oh cool. Many thanks. Since I saw schweser note mentioned ‘Par rate is the YTM of a bond trading at par’, so I just query why need so specific a YTM of a bond trading at par.

But, it sounds like stupid when asking this question, why par curve is called ‘par curve’ if not necessary using a bond trading at par ? Is it a traditional convention to keep this name ? The name is a bit misleading.

#4

It’s called the par curve because bonds trading at par would have those yields as their coupon rates.

Just one of those things you have to remember.