Term structure represents the annual return on a n-yr ZERO-COUPON bonds. They are n-yr spot rates. You can use them to work out yield on bonds that do pay coupons.
To work out n-yr spot rates you need the current 1-yr spot rate and future 1-yr spot rates
y2 (2-yr spot rate) represents the annual return on a two year zero-coupon bond.
y2 = ((1+y1)(1+f11))^(1/2)
similarly:
y3 = ((1+y1)(1+f11)(1+f21))^(1/3), and so on...
y1 is current 1-yr spot rate
f11 is a fwd rate, it is 1-yr spot rate in 1 years time
f21 is 1 yr spot rate in 2 years time.
Good luck.
Last edited by a moderator: Sep 27, 2015