CORRECTING THE YIELD CURVE: A RE-INTERPRETATION OF THE DURATION PROBLEM.

The article presents a re-interpretation of the duration problem associated with calculating the yield curve of bonds, which relates bond yields to their terms to maturity. The presence of coupon payments introduces the complication of duration, the effects of which arise from the use of the incorrect discounting formula. The authors briefly discuss duration, the biasing effect it has on the formulation of the yield curve, and a technique for to correct for the duration problem. The inverse relationship between observed yields on stocks and dividend payments is explained.