Bootstrapping

Bootstrapping

Creating a theoretical spot rate curve using one yield projection as the basis for the yield of the next maturity. Bootstrapping follows the work of Efron. It involves a Monte Carlo approach.

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Bootstrapping

1. The act of starting a company with personal finances rather than through loans or venture capital. This is obviously a large risk to the entrepreneur as he/she has no recourse should the business fail. On the other hand, it allows the entrepreneur to maintain control of the business and has the potential to be very successful. According to a famous story, Ross Perot established Electronic Data Systems with $1,000 in personal savings; he maintained complete control of the company until its IPO six years later. See also: Seed money.

2. A method to calculate the yield curve on a zero-coupon Treasury bill. Because the U.S. Treasury does not issue new T-bills constantly, bootstrapping is used to create a yield curve by filling in the missing yields on the T-bills.