Why are only Government bonds used for the estimation of the ZCYC?
The ZCYC depicts the relationship between interest rate and maturity for a set of ‘similar’ securities, as on a given date. To derive the ‘true’ term structure, we need to have a sample of bonds that are identical in every respect except in term to maturity. Government securities do, in practice, different by coupon rates; nonetheless, these come closest to satisfying the requirement, hence most empirical studies have concentrated on this segment of the securities market.
