Are we entering an unprecedented economic situation?

| 28-02-2020 | treasuryXL | Pieter de Kiewit

One of my favourite professional pastimes as a corporate treasury recruiter is digesting treasury technical content and bridging it to the “rest of the world”. Or see what is happening in the global news and projecting it on the field of corporate treasury.

Currently there is a constant flow of news about too much money in the market. One would say this is a good thing. Let me give you some positive and negative examples of the effects:

But also:

  • Pension funds are not able to invest in a future-proof way;
  • We have to pay for our savings (if you have a lot);
  • Hedge fund managers use external funding, instead of the funding of their investors, to safeguard their bonuses.

We enter an unprecedented economic situation only encountered by Japan and there is no obvious path to take. I will not try to clarify macro economics, it is not my field of expertise, but do know that changing demographics contribute. Us getting older and people retiring rich, most likely richer than their kids, has to do with this. What do I see as effects on corporate treasury? Let’s focus on three main tasks of a corporate treasurer.

In cash & liquidity management there are many exciting initiatives in the improvement of cash flow forecasting. Payments can technically be done smoother, safer and quicker. Cash visibility can be increased and liquidity is centralized. Most corporate treasurers want to implement these new solutions. As liquidity is high, many CFOs do not feel the urgency to invest in these initiatives. Doing nothing will not result in higher cost, so what is the ROI?

In risk & investment management the obvious focus is on interest developments. The general opinion is that interest will be low for a very long time. Getting long term funding for (almost) 0% is doable. So why bother matching long and short term funding options? This results in a situation that the use of hedging instruments is less important. Investing excess cash or helping the company pension fund with their strategy currently requires analysis and choices.

Corporate Finance has the fun task of optimizing the balance sheet and lowering funding costs to an extreme. I recently met the group treasurer of a real estate company who is able to make money attract funding for his company! The more challenging task of corporate finance is participation in business development and M&A. The willingness of entrepreneurs, shareholders and boards to invest in adventurous ways is high. The corporate treasurer has to hold on to his role of risk manager and hit the brake. This does often not increase his popularity…

A lot more can be said about the topic, that will be for other blogs. Back to a non-corporate mindset and not pretending to be a socialist, I hope all this money will be used to improve the world: better the environment, lowering the income gaps, makes us all happier. The real philosophical approach I leave to Notorious B.I.G.

Enjoy your money,



Pieter de Kiewit

Owner at Treasurer Search

Corporate Governance and Treasury | Embrace the Corporate Treasury Policy

| 18-02-2020 | François de Witte | treasuryXL |

Corporate Governance

Corporate Governance is a mechanism through which boards and directors can direct, monitor and supervise the conduct and operation of the corporation and its management in a way that ensures appropriate levels of authority, accountability, stewardship, leadership, direction and control.

The ultimate responsibility for Treasury management within an organization lies with the board of directors. Due to the practicalities and technical aspects involved in corporate treasury, the board typically delegates the daily management of risk to responsible individuals in each department. In the case of financial risks, many of these are delegated to the treasurer.

Whilst, due to its specific activities, the corporate treasurer needs to take a lot of actions and decisions independently, it is important that he does this within a framework and Governance. Quite a lot of corporates have formalized this in a “Corporate Treasury Policy”.

Corporate Treasury Policy

The Corporate Treasury Policy is the mechanisms by which the board, or risk management committee (RMC), can delegate financial decisions in a controlled manner. This document should be a summary of all the principles approved by the Board or the Financial Committee of the Board as a mandate of the Board to the treasurer (the Treasury Mandate).

The Corporate Treasury Policy is a framework document, which covers the following areas:

Organization of the Treasury Function

In most of the companies, the Corporate Treasury Reports to the CFO. The CFO is usually himself a Member of the Executive Committee, which itself reports directly to the Board of Directors. (Treasurer – CFO – Treasury Committee – Audit Committee – Board):

A policy should set out clearly which decisions are delegated to the treasurer and when the treasurer should refer a decision back to the board or other person within the organization. Within several corporate, the Board of Directors have delegated the decision process to dedicated committee, like the Risk Committee, and the Liquidity and Funding Committee.

Treasury Control Framework (including the Code of Conduct)

Procedures and controls to manage the risk should be put in place to provide an overall framework for decision-making by the treasury team.

Ideally, this should also include a code of conduct. The Corporate Treasurer should act as a Corporate Custodian. In other words, he is Protector of the company’s assets, and should act according to a strict Code of Conduct and Ethics. There exist examples of codes developed by professional organizations such as IGTA, ATEB, AFTE, ACT and ATEL.

Liquidity and funding

The board should be informed about funding possibilities to put currency, maturity, cost and equity/debt character into a wider context. The board should decide on the strategy but can delegate fund raising decisions and actions to treasury. However, I recommend that Treasury asks the final board approval for strategic decisions (e.g. major syndicated loans, bond issues, etc.).

The board should have an overall view on the liquidity risk of the company. The Board should also define the financial policy, covering the gearing and maturity issues, fixed and variable interest rate obligations, dividend policy and covenants.

Banking Relationship

Banks chosen by the treasurer must be able to meet the needs of the organization, both domestically and internationally. I recommend that the Board approves annually criteria for selecting the banks with whom it will work.

Risk Management

The Treasurer must identify the various risks to which the company is exposed, quantify the impact, and should inform the Board thereof. He should estimate the size of these exposure risks and their impact on the he overall operations and financial performance of the company, and make recommendations in these areas

The board must approve the hedging policy, the company’s foreign exchange, interest rate and commodity risk management policy and its attitude to risk. It should define which part of the risks must be hedged and the hedging horizon. I recommend that the Treasurer submits at regular intervals to the Board the list of authorized instruments, the amount per instrument and their term

Investment Policy – Counterparty Credit Risk

The board should approve the treasury’s Investment policy including the choice of instruments, the list of counterparties used + the maximum amount/counterparty & maturity. It is recommended that the Board provides guidelines and limits per instrument.

It is recommended that the Board approves the guidelines for fixing counterparty limits, and maximum exposure per counterparty.

Authorized instruments and Arrangements – Authorized Approvers

The Treasurer should make sure that the board must understands and approve the strategies and instruments used and sets guidelines for the appropriate limits for their use. These guidelines need to ensure that treasury has not sacrificed long-term flexibility or

survival for short-term gain, especially in view of the volatile financial market’s situation.

Treasury Operational Risk

The treasurer should make the Board aware of the operational risks to which the company is exposed. He should provide recommendations in this area. Furthermore, the treasurer should also submit recommendations to the board on the treasury organization and the ways to reduce the operational risks.


A Corporate Treasury Policy has only sense, if there is a regular follow up and control framework; Hence procedures and controls to manage the risk should be put in place to provide an overall framework for decision-making by the treasury team.

It is also important to provide to the Board a regular update on the way the treasurer complies with the policy. The policy should also be regularly reviewed.

Treasury must alert the board to external changes and internal strategic developments, which may have long-term implications for the organization and make proposals for managing them.

The policy needs also to be reviewed at regular intervals each “Policy” in function of the market and of other internal or external developments. I recommend having treasury on the Board’s agenda on a quarterly basis.


Treasury is not an island in the company. It is closely linked to the corporate governance. Hence it is important to define the right framework.

I recommend to corporates to put in place a treasury policy validated by the Board of Directors and reviewed regularly. It is important to update the Board at regular intervals about strategic topics, such as strategic financing topics and risk management.

The treasurer has also an important educational role, as he must be able to make complex treasury topics understandable for the board members.

Hence there must be a good interaction between the treasurer, the CFO and the Board is key, where the Treasurer is the linking pin.


François de Witte
Founder & Senior Consultant at FDW Consult
Managing Director and CFO at SafeTrade Holding S.A.
treasuryXL ambassador

Top 5 most common pain points in Treasury

14-02-2020 | treasuryXL | Michael Ringeling

The purpose of Treasury is to manage a company’s funding, liquidity and to mitigate its financial and other risk. Made up of three sub-disciplines, Treasury’s overall objective is to safeguard the company’s holdings and to follow the long-term strategy set forth by Corporate Finance (and strategy). Cash Management, on the other hand, is primarily focused on operational, short-term, efficiency and process optimisation, whereas Risk Management is oriented towards financial research and operational controls.

Michael Ringeling, corporate treasury expert,  made a top 5 of the most common pain points he encounters in Treasury, including consequences and a solution.

Top 5 of the most common pain points in Treasury


  1. Too many bank accounts at too many banks

Complex to manage, poor control, higher risk of fraud, higher costs, more KYC/AML requirements

Less bank accounts at fewer banks, all via one or two electronic banking systems or multibank platform to manage payments and cash flows. The result will be more efficient, more secure and more cost-effective payment transactions, reporting and reconciliation into the ERP system.

  1. No reliable cash flow forecast

Poor liquidity management. Insecure about the required short and long term funding and poor management information.

A good cash flow forecast, providing adequate insight in the organisation’s short and long term cash flows, will contribute to an efficient funding strategy and lower cost of funds.

  1. FX results, (negatively) impacting the company’s P&L

The company’s financial results are impacted by unforeseen and unknown FX results

FX risk management analyses, create a FX policy and perform deal execution (hedging) to control FX results

  1. New Loan Agreement needed – negotiations

Difficulties in assessing if the loan terms and conditions are fair. Risk of overpriced loans and/or unfavorable terms and conditions required by the bank(s).

Assist the company when negotiating with the bank(s) to get a fair deal with terms and conditions that will not unnecessary limit the company’s flexibility.

  1. Cash is trapped on too many stand alone bankaccounts around the world

Company cannot effectively use a significant amount of cash, resulting in higher (short term) loans and higher interest costs.

Implementation of a cross border cross currency cash pool to centralise the company’s cash balances. As a result the amount of local trapped cash will be reduced and that cash can be used for general corporate purposes. Less short term loans and lower interest costs.

Sounds familiar?

Do you recognize the pain points that we mention above in your business? Or are you experiencing other critical treasury pain points in your business?

In our active network there are several treasury experts who can offer treasury support. They can be hired for specific projects or on a regular basis. Check Rent a Treasurer and let us help you.


Michael Ringeling

Corporate Treasurer Expert

Be careful what you wish for in crowdfunding

| 02-07-2019 | by Pieter de Kiewit |

Over the last decade bankers have taken over from civil servants and public transport employees as the ones to complain about. Yours truly is also guilty and I still meet bankers who do not like to talk about their profession because they are annoyed about the bashing. Nobody is perfect but haven’t we all been too harsh on bankers?

This question popped up last week when I read about crowdfunding developments. This relatively new form of funding is growing quickly. I see at least three obvious reasons for this. First, regular banks are reluctant to fund SMEs. Regulatory requirements, ROI and risk profiles of their potential clients are some reasons for that. Second, there is a lot of liquidity in the market and it is hard to make proper investments. Third and last, various platforms, with easy accessible IT solutions, facilitate investors finding those who need funds. Why my plea to go easier on the bankers?

With crowdfunding platforms building a track record, issues are becoming very visible. There are two very prominent problems. Many SMEs using crowdfunding facilitate the payment of extremely high interests, the term loan sharks already came up. The other prominent problem is that the credit risk process in crowdfunding is often very weak. This results in the funding of unstable businesses and weak plans, ending up with funders empty-handed.

I am a small business owner, the chamber of commerce sells my address to whoever pays. On a very regular basis I receive mail informing me how much I can borrow. Crowdfunding is not regulated like banks are. Process and expectation management is being done quite aggressively by platforms and I understand problems are becoming obvious as the market matures. I invite you to read input from Lex van Teeffelen and others:

RTL Z/ANP: Failliet door crowdfunding: ‘Hoge rentes nekken ondernemers’
Lex van Teefelen: Dalend rendement crowdfunding 2019 / Flitskrediet: meer vloek dan zegen! 

This brings me back to where I started with: were we right in bashing bankers? Their processes are more sound, their communication is done with more restraint. There were extremes, mistakes were made and greed was obvious. I think most bankers tried and try to do an honest and professional job. Let’s keep each other informed, educated and ask before we judge. Hopefully we will get better in doing a proper funding job.






Pieter de Kiewit
Owner Treasurer Search


Blockchain Smart Treasury: game-changer for treasurers?

| 19-3-2019 | Carlo de Meijer | treasuryXL

Though blockchain is not yet well understood by many treasury people, and tangible real-world applications for the corporate treasurer’s day-to-day activities are still scarce, this technology is getting increased interest in the treasury world.

In August 2016 I wrote a blog in Finextra named “The Corporate Treasurer and Blockchain”. My conclusions at that time were that blockchain had the potential to fundamentally change the treasury function at corporates. For some it would even going to be a game-changer for treasury. The change might not be here yet, but it is coming, and treasurers need to take a long view on it.

But that is changing rapidly. The focus of blockchain developers is now turning from proof of concept projects to the creation of more practical, treasury-focused blockchain solutions. Recently we have seen a number of blockchain-based treasury trials that are worthwhile looking at. Last December R3 announced the completion of testing on a new blockchain-based KYC proof-of-concept, which was facilitated in collaboration with the French Association of Corporate Treasurers and a number of French banks.

One of the solutions that triggered me most is Smart Treasury by Boston-based fintech Adjoint, that is aimed to enable real-time gross settlement and continuous reconciliation and improve the liquidity management of the corporate treasurer. Main question is, could Adjoint’s solution be a break-through for blockchain in the corporate treasury world?

It is always interesting – and I am a very curious person – to see new initiatives in the blockchain scene and what they could bring for corporates esp. the treasury department.

So let’s have a deeper dive.

Complex treasury environment

Internationally operating corporates have undergone many transformations in their finance and treasury organisations triggered by technology innovations, regulatory initiatives and changed client behaviours. As a result today’s business environment for these corporates is highly complex from a treasury point of view.

In the digital era, real-time insight into a company’s global cash positions and managing credit facilities across all bank accounts of the group and the ability to move money intraday to where and when it is needed is increasingly needed to support this changing business environment.

Key challenge is to obtain consolidated information of group-wide multi-currency positions across a fragmented banking network in a timely manner. Today’s model of international correspondent banking however does not easily facilitate the ability to manage cash in a real-time environment.

Corporate treasurers are urgently looking for new ways to provide cash management with up to date – and if possible real time – information on cash positions and cash forecasts faster and with deeper insight, allowing corporate treasurers to better react to the company’s current cash and working capital needs.

In this context, they are significantly increasing their spending on treasury technology and innovations, to speed up and streamline their company’s cash, liquidity, risk and working capital management, in order to gain greatest visibility over their business critical function and reach greater strategic control.

Adjoint’s Smart Treasury: what does it bring for corporate treasurers?

Adjoint’s Smart Treasury solution, that was launched last year, contains a number of unique specifics that makes it very interesting for corporate treasures.

Smart Treasury should be seen as a multi-bank, multi-currency virtual account platform for real-time gross settlement and continuous reconciliation. This should allow corporate treasurers to untap liquidity in their various subsidiaries’ bank account.

Adjoint has combined blockchain technology with related smart contracts and APIs (or application programming interfaces) to create a solution that aims to dramatically speed up settling intercompany transactions in a secured way while significantly reducing the costs.

Most important features of this Smart Treasury solution are the following:

Distributed ledger: Auto reconciliation

Smart Treasury uses distributed ledger technology to auto-reconcile transactions information, thereby eliminate netting processes and improve FX management to provide treasurers with streamlined efficiency and improved, real-time visibility on cash positions.

Virtual accounts

Another interesting feature is that it enables a limitless number of virtual or “sub-accounts” for reconciling customer and suppliers payments. Companies can thereby consolidate costly, physical bank accounts into a selected number of blockchain virtual accounts. Smart Treasury thereby enables “purposed drive allocation”, thereby using smart contracts to designate how much and where digitised cash can be spent from these virtual accounts.

“Money can then be debited or credited among those accounts as needed, using smart contracts and APIs to make the necessaire FX translations, apply interest on intercompany loans and similar calculations.” Somil Goyal chief operating officer at Adjoint

In-house self-service bank

Smart Treasury consists of an “always-on” in-house self-service bank with “pre-established” rules for automated intra-company transactions. Here you could think of limits on how much can be automatically borrowed by entities based on pre-established interest rates. Nowadays, intercompany transactions, often conducted via an in-house bank, have become essential for multinational corporations. They seek to leverage internal resources more effectively. However, the overnight batch systems most companies use to settle transactions, can limit the transparency into subsidiaries’ account balances.

Smart Treasury Dashboard: access

The solution allows corporate treasury departments to operate their own private distributed ledger. This may enable them to choose which internal corporate entities and third parties including customers and suppliers may have access to the network via their Smart Treasury Dashboard and settle transactions directly with them in real time, rather than overnight or even longer.

But also regulators could be added on the platform which may help notional pooling in jurisdictions with currency controls, while improving the regulatory reporting process by automatically updating records and centralising all information in the ledger.

Smart contracts

Another key feature of Smart Treasury is the use of smart contracts. The tool’s Smart Contracts System uses blockchain to help teams define and set pre-configured rules that securely enable automated, real time transactions. These may include key corporate treasury functions such as regulatory and corporate compliance requirements including KYC; account opening or transactions such as intercompany loans, FX and netting, manage liquidity in multiple currencies, transfers among any approved entities etc. so lowering the costs of booking transactions between subsidiaries.

API integration with corporate ERP and TMS systems

Smart Treasury offers a nearly real-time API-based integration with organisation’s existing systems. Instead of replacing systems such as enterprise resource planning (ERP) and Treasury management system (TMS), Smart Treasury works with current systems as an easy-to-be-integrated overlay, preventing duplicate entries. In fact Smart Treasury complement these, improving the way they interact by speeding up intercompany transaction settlement. Through using smart contracts, all transaction information is auto-reconciled and automatically posted into treasury management systems in real-time.

“With Adjoint’s solution this takes place much faster, at a much lower cost, and it will actuality accept feed from the banks using APIs, which then feed the ERP – again using API – and it carries all of the information necessaire through smart contracts”.Daniel Blumen, Partner of Treasury Alliance

API integration with banks

Smart Treasury also offers a real-time API-based integration with banks for transactions outside the organisation. The solution allows the use of APIs for real-time intra-day bank transactions processing as opposed to end of day batch processing. They enable the transfer of critical information and data between corporate entities and their banks and data providers, as well as between corporate entities within the corporate.

Read the full article of our expert Carlo de Meijer on LinkedIn



Carlo de Meijer

Economist and researcher


Intercompany financing – complying with procedures

| 18-12-2017 | treasuryXL |

Many businesses (not just multinationals) finance the operations of their subsidiaries/affiliates via intercompany loans. During the financial crisis external funding became more difficult to obtain, and more businesses attempted to finance their operations internally. Whilst this can be a good procedure, consideration must be given to the fact that the loans must still be proper loans, compliant with normal market practices. Below we attempt to explain the relevant procedure.

Arm’s length principle

All terms and conditions of the intercompany loan – with special consideration for the interest rate – must be consistent with independent external loan funding. A business can not adopt a more generous approach to funding its subsidiaries than could be obtained externally. The pricing of the loan must reflect the perceived credit risk of the entity that is seeking funding.


Just as with external financing, legal documentation needs to be drawn up and signed that clearly shows the terms and conditions of the loan. Standard covenants should be included together with a schedule showing repayment of principal and interest. If a subsidiary is granted an embedded option (early repayment without a penalty) then this must be clearly noted. Whilst the documentation does not have to be as large as that used by banks, it should always contain all relevant clauses, and both parties must adhere to the signed loan agreement. Included within the documentation should be a detailed explanation as to how the price and spread was determined, along with external data proof.

Credit modelling

As most subsidiaries are small and have no independent credit rating, an approach must be taken to attempt to define their creditworthiness. Standard metrics can be used to ascertain an internal rating. Just with a normal external loan, attention should be paid to the ability to repay. Whilst tax authorities may question the integrity of the credit modelling matrix, this can at least be negotiated if a dispute arises. If no matrix is available, then problems can occur.


As previously stated, an internal loan should replicate the general conditions of an external loan. That means that when trying to determine the interest rate, full attention should be given to the funding costs of the main company. They need to determine what price they would pay externally to fund the loan and then apply a premium to the subsidiary. Traditionally rates can be fixed or floating with a premium.

Corporate Governance

Internal loans should always be monitored. They should not be a quick substitute for proper due diligence. Problems can easily arise if tax authorities reached the conclusion that the loan is being extended to a loss-making entity that would not receive funding externally.

Yield Curves (term structure of interest rates) – filling in the blanks part II

| 03-06-2016 | Lionel Pavey |

Most treasurers do not have access to a dedicated financial data vendor (Bloomberg, Reuters) but are regularly faced with having to discover prices related to yield curves. There are websites that can provide us with relevant data, but these are normally a snapshot and not comprehensive – the data series is incomplete. It is therefore up to the treasurer to complete the series by filling in the blanks. In my previous article I went over the first approach. Today I’ll talk about the second approach.

A second approach would be to apply a weighting to the known periods of the par curve and to average the difference out over the missing periods.


Schermafbeelding 2016-06-02 om 13.49.46

This leads to 1 year constant maturity rates that are almost equal in value for all the periods between 2 known periods. Whilst these forward rates are also not correct they at least supply us with a visual indicator as to the general shape of the forward yield curve – the 1 year constant maturity rates

reach their zenith between years 12 and 14; after that point they then start to decrease.

Futhermore, taking into consideration the yield curve as shown in the graph, we can make the following conclusions about the 1 year curve:-

  • 11 year rate must be higher than the linear interpolated rate but lower than the weighted interpolated rate
  • 13 year rate must be higher than the weighted interpolated rate
  • 15 year rate must be lower than the linear interpolated rate and lower than the weighted interpolated rate
  • 16 year rate must be higher than the linear interpolated rate and higher than the weighted interpolated rate
  • 20 year rate must be lower than the linear interpolated rate and lower than the weighted interpolated rate
  • The implied forward 1 year constant maturity curve must be smooth and monotonic.

On the basis of these restraints a par curve can be built that leads to the following forward curve.

grafiek2_part2Schermafbeelding 2016-06-02 om 13.50.01

The rates for the missing periods have been calculated manually whilst adhering to the conditions mentioned before– there are formulae which would allow rates to be discovered (Cubic spline, Nelson Siegel etc.) – but these rely on random variables and I have yet to see anyone quote and trade prices based solely on a mathematical formulae.

Visually, the 1 year curve meets all the criteria for the construction of a yield curve, together with the underlying par and zero yield curves.



To ascertain that the rates are correct, discount all the cash flows of the par yield for the given maturity – they should equal 100.

Here is an overview of all the implied 1 year rates using the different methods to construct the yield curve.


For a quick calculation a straight line interpolation is acceptable with the warning that with a normal positive yield curve the real prices will be higher than the prices calculated by straight line interpolation. For a negative yield curve this would be reversed – real prices lower than interpolated prices.

The average difference between the par yield prices of the adjusted smooth yield and the straight interpolation yield are only 2.5 basis points. However, this difference is magnified when looking at a 1 year forward yield curve where the average difference is 22.5 basis points per period with a maximum of 53.5 basis points.

Next – Zero Coupon Yields and implied Forward Yields

Would you like to read part one of this article?
– Yield Curves (term structure of interest rates) – filling in the blanks


Lionel Pavey



Lionel Pavey



Yield Curves (term structure of interest rates) – filling in the blanks

| 27-05-2016 | Lionel Pavey

Most treasurers do not have access to a dedicated financial data vendor (Bloomberg, Reuters) but are regularly faced with having to discover prices related to yield curves. There are websites that can provide us with relevant data, but these are normally a snapshot and not comprehensive – the data series is incomplete. It is therefore up to the treasurer to complete the series by filling in the blanks.

A quick refresher about the construction of a yield curve raises the following points:-

  • All data must be from the same market (treasury bonds, Interest Rate Swaps (IRS) etc.)
  • A regular term (maturity) is preferred for ease of construction
  • A curve must be smooth
  • An implied zero yield curve can be built from the smooth par curve – a theoretical yield curve where no interest is paid until maturity. In a bond this would redeem at par (100) and be issued at a deep discount to par
  • A series of discounted cash flow factors (DCF) are produced
  • An implied forward curve with constant maturities can be built from the par curve
  • An implied forward curve must be monotonic – each point in an increasing sequence is greater than or equal to the preceding point, each point in a decreasing sequence is smaller than or equal to the preceding point

If we look at IRS par yield prices that can be found on a website, we can regularly see yield prices for periods from 1 year to 10 year inclusive, a 15 year price and a 20 year price. To construct a complete curve from 1 year up to and including 20 years we need to fill in the blanks at 11,12,13,14,16,17,18 and 19 years. These yields are assumed to be par yields – the coupon rate is equal to the yield to maturity and the instrument trades at par.

Before starting let us define the procedure for constructing a par yield curve:-
The methodology used is called “bootstrapping”. This allows us to extract discount factors (DCF) from the market rates. DCF’s allow us to calculate a value today for a cash flow in the future.

We assume that the nominal value for all calculation purposes is 100

For a 1 year rate we know the interest and redemption amount at maturity. A DCF is built whereby the net present value (NPV) of these future cash flows in 1 years’ time is equal to 100 or par.

For a 2 year rate we receive interest after 1 year and interest and redemption amount at maturity.

We discount the 1st years’ interest with the DCF we obtained from the 1 year rate and deduct this amount from our initial nominal of 100. This net amount is then divided by the interest and redemption at maturity (at end of 2 years) to obtain the DCF for the 2 year rate.


1 Year                                      7%                          2 Year                          9%

1 Year      
100 / (7/100+100) = 0.93457944 (DCF)

2 Year
9 * 0.93457944 = 8.41121496
100 – 8.41121496 = 91.58878504
91.58878504 / (9/100+100) = 0.8402640829

These DCF’s can then be used to find the NPV of any cash flow maturing in 1 or 2 years’ time.

The following example shows a yield curve from February 2013 published on the website of an interbank broker.

yield curve February 2013

yield curve February 2013

The quickest way to price the missing periods would be with straight line interpolation of the par curve between the known points – which would produce the following par curve, zero yield curve and forward curve with constant 1 year maturity.

yield curve February 2013 - 2

yield curve February 2013

Straight line interpolation

Straight line interpolation


Whilst the par curve and zero curve are smooth, the implied 1 year constant maturity curve is jagged and certainly neither smooth nor monotonic. The 11th 1 year period rate is lower than the 10th period and the 15th 1 year period rate is higher than the 16th period.

A second approach would be to apply a weighting to the known periods of the par curve and to average the difference out over the missing periods. Read more on this second approach in my next article which will appear next week.

Lionel Pavey



Lionel Pavey