The price of credit

Generating a zero-coupon curve is the first step in pricingany derivative structure, as any practitioner ofinterest rate derivatives knows. To generate thecurve, one needs to calibrate it to the market pricesof benchmark instruments, eg, par interest rateswaps. Although there is no unique way to do this,the term structure of par swap coupons is “dense” enough1 to leave verylittle uncertainty about discount factors, as well as the zero-coupon andforward rates.

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