How do I get more information on method used for the calculation of discount factors for FIXEDBYZERO function in Financial Derivatives Toolbox R2007b (5.1)?

I need information on calculation of discount factors in valuation of fixed income securities with functions like fixedbyzero. Specifically, which method (e.g., linear interpolation, logarithmic inteerpolation, cubical splines, bootstrapping etc.) is used to calculate discount factors.

Answer 1

[MathWorks Support Team]

Interpolation is done only if necessary. If the time periods corresponding to the rates passed into the functions via RateSpec, coincide with those needed to discount the instrument’s cash flows, then interpolation will not be necessary and discount factors can be calculated directly. This is typically done via the function RATE2DISC. For more information about RATE2DISC, type the following command at the MATLAB Command prompt:

doc rate2disc

Now, if the rates are not zero rates, or the zero dates do not correspond to those of the instrument's cash flow dates, then interpolation will be necessary. This interpolation needs to respect the original discount factors implicit in the specified interest rate term structure (RateSpec), so a combination of optimization and linear interpolation is used. All of these calculations are done inside the function RATETIMES. For more information about RATETIMES, type the following command at the MATLAB Command prompt:

doc ratetimes