| It is common in finance industry to estimate the current zero-coupon yield curve (or forward rates) from the prices of both zero-coupon and coupon bonds. Such curve fitting methods as nonlinear least squares of several varieties are used for this purpose. We describe a technique for fitting the term structure of interest rates using smoothing splines, which incorporate a roughness penalty. The roughness penalty is selected by generalized cross-validation. The model is then used to extract the discount, yield, and forward rate curves from the Taiwanese Government Bond data. |