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Report July 2003, Introducing the Yield Curve as a Tool in Credit Risk Analysis

We generate a yield curve that approximates the risk-free yield curve. Since government bonds are considered virtually default-free, the GOVI benchmark bonds (a selection of the most liquid fixed rate government bonds) form a term structure of nearly risk-free interest rates. Using this term structure, a smooth continuous yield curve is fitted relating an approximated risk-free interest rate to any bond duration term.