With regard to a theoretical Treasury yield curve constructed with the bootstrapping method:
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A. B. C.C
In the context of constructing a theoretical Treasury yield curve using the bootstrapping method, let's analyze each answer choice and determine its accuracy:
A. every point on the curve is constructed by utilizing current on-the-run Treasury yields of various maturities.
This statement is incorrect. The bootstrapping method does not exclusively rely on current on-the-run Treasury yields to construct every point on the curve. Instead, the method involves using a combination of both on-the-run (most recently issued) Treasury yields and off-the-run (previously issued) Treasury yields. By incorporating off-the-run yields, the method ensures that the resulting yield curve accurately reflects the entire spectrum of maturities.
B. the yield for most maturities used to construct the Treasury yield curve are observed yields rather than interpolated yields.
This statement is correct. When using the bootstrapping method, the observed yields of Treasury securities are used to construct the Treasury yield curve for most maturities. These observed yields are typically obtained from the market through the trading of Treasury securities. This approach helps ensure that the constructed yield curve represents the actual yields observed in the market.
C. any yield on the Treasury yield curve that is not one of the on-the-run maturities is only an approximation for that maturity.
This statement is incorrect. The bootstrapping method aims to provide an accurate representation of yields for all maturities, not just the on-the-run maturities. Through the use of interpolation techniques, such as cubic spline interpolation, the method estimates yields for the non-on-the-run maturities. These interpolated yields are not mere approximations but rather calculated values based on the observed yields of both on-the-run and off-the-run Treasury securities. The goal is to generate a smooth and continuous yield curve that accurately reflects the term structure of interest rates.
To summarize, the correct statement is:
B. The yield for most maturities used to construct the Treasury yield curve are observed yields rather than interpolated yields.
This answer accurately reflects the process of constructing a theoretical Treasury yield curve using the bootstrapping method.