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When valuing derivatives, partcularly interest rate derivatives one of the assumptions will be the risk free rate used for discounting. Also when valuing an interest rate swap, you will need to calculate the expected forward rates that will be used for the floating leg of the swap. 

To do this we need to build a swap curve from current market data such as LIBOR or EURIBOR deposits and par swap rates.

Our short-term rates made up of LIBOR or EURIBOR deposits reflect zero-coupon rates. Generally, this rates will start with the overnight rate and two-night, then one week, two week, then monthly until twelve months. The rates one week and longer will settle two dates out. 

libor deposits

The longer-term of curve will be made up of par swap rates. These rates reflect the fixed coupon rate of a fixed-floating swap where the fixed leg would be valued at 100. These par swap rates will start at one year and go up to 30 years or longer.

par swap rate

Because we're combining short term rates which are zero-coupon rates with those that are compounding rates, we need a process that will put the rates into a common form. We use a zero curve bootstrapping process to do this. With bootstrapping, we start with our shortest tenor deposits and convert the rate into a discount factor, then step forward through our available rates using the previous rates to calculate discount factors through time. 

We will go into much more detail on swap curve construction in in these articles:

Curve building using LIBOR rates

Curve building using Swap Rates 

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