Toy interest rate curve calibrator

The attachment contains a toy RFR (e.g. SOFR, ESTR) )curve calibrator and a Libor-type pricer.

It is called a toy because the day count convention and effective/settlement date are not accurately considered. Also, the fine structure of the front end of the RFR curve (short tenors) is not handled. To handle front-end fine structure, short maturity instruments should be used as calibration instruments for example FRA (forward rate agreements). In this toy example, only par swap rates are used.

A key part of an interest rate calibrator is an optimizer or a solver (bootstrapping case only). In this toy example, Excel Solver is used. This is a widely available tool as long as you have Excel. See the Microsoft help page for how to turn on Solver: Load the Solver Add-in in Excel.

Note 1: The calibrator part is set up for a swap whose floating leg pay frequency is annual only, e.g., ESTR and SOFR, because the cashflows are evaluated out of 1-year forward rate. If you were to strip a Libor curve, you have to make the tenors granular enough to cover every payment (every quarter in the Libor case) and add more interpolation pillars.

Note 2: The RFR rate is compounded daily. The actual interest rate paid is a backward-looking backward rate. But it is still reasonable to use a forward rate to evaluate cashflows because any compounding format describes borrowing money for a certain period. The key variable that drives the whole curve is the discount factor, which could be equivalently expressed as forward rate, zero rate, etc.