Interest Rate Swap Valuation and Applications › Key Parameters

The key parameters for bootstrapping the swap curve are the inputs and outputs of the iterative procedure that builds the discount function from market data:

• $S_T$: Par swap rate. The market rate observed for a specific maturity, representing the fixed rate at which a new swap would have zero value.
• $Z(0, t)$: Discount factor. The unknown variable being solved for iteratively at each maturity point. These factors encode the present value of future cash flows.
• Maturities: The tenor points of the input swap curve (e.g., 1y, 2y, 5y). Market data is typically available at standard tenors, and interpolation may be needed for intermediate points.
• Zero Rate: The continuously compounded spot rate implied by the discount factor. Calculated as $r = -\ln(Z(0,t))/t$, and gives an alternative representation of the same information contained in the discount factors.