Modeling the yield curve of Burundian bond market by parametric models

Abstract

The term structure of interest rates (yield curve) is a critical facet of financial analytics, impacting various investment and risk management decisions. It is used by the central bank to conduct and monitor its monetary policy. That instrument reflects the anticipation of inflation and the risk by investors. The rates reported on yield curve are the cornerstone of valuation of all assets. To provide such tool for Burundi financial market, we collected the auction reports of treasury securities from the website of the Central Bank of Burundi. Then, we computed the zero-coupon rates, and estimated actuarial rates of return by applying the Nelson-Siegel and Svensson models. This paper conducts a rigorous comparative analysis of these two prominent parametric yield curve models and finds that the Nelson-Siegel model is the optimal choice for modeling the Burundian yield curve. The findings contribute to the body of knowledge on yield curve modeling, enhancing its precision and applicability in financial markets. Furthermore, this research holds implications for investment strategies, risk management, second market pricing, financial decision-making, and the forthcoming establishment of the Burundian stock market.