Bootstrapping (yield curve)
Quantitative Finance glossary · Quantitative Finance
Definition
Sequential extraction of zero-coupon discount factors P(0,T_i) from market instruments of increasing maturity (deposits, FRAs/futures, then par swaps), each step solving for the unknown P(0,T_i) given par-pricing of the next instrument. Post-2008, single-curve bootstrapping was replaced by multi-curve: an OIS (now SOFR-OIS) discount curve plus separate forecasting curves per tenor basis (1M, 3M, 6M), because tenor-basis spreads ceased being zero. Cubic-spline or monotone-convex interpolation between nodes; the choice meaningfully affects forward rates.
Bootstrapping (yield curve) in plain English
A dollar promised to you next year is worth a little less than a dollar today, and a dollar promised in ten years is worth even less. Bootstrapping is how traders work out that exact "today value" for every future date, and they do it like climbing a staircase: use the shortest, simplest market prices to pin down the near term, then use that answer to unlock the next date out, and so on. It's just like solving a chain of clues where each solved clue hands you the one fact you need to crack the next. (After the 2008 crisis, banks found different lending periods no longer lined up, so instead of one staircase they now build several linked ones — a main "discount" curve plus separate curves for 1-, 3-, and 6-month lending.)
Also called: yield curve
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