Fitting the yield curve

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

This paper is concerned with the fitting of the yield curve in order to achieve a continuous term structure of interest rates by applying two methods: the cubic polynomial spline by McCulloch (1975), and the Nelson-Siegel-Svensson (1994). Subsequently, a trading model is used to make sensitivity analysis decisions on whether to buy or sell a bond (reach/cheap analysis). Finally, with the purpose of forecasting future yields, out-of-sample forecasts are calculated for the parameters of the Nelson-Siegel-Svensson.