Instruments are included in the calculation of the yield curve if:
- their computed value of pseudoModifiedDurationCost is calculable and exceeds a minimum, and
- they actually exist — that is, that they are not pre-issue instruments incorporated into the system at issue price, and
- they have a credit rating equal to or in excess of a minimum (Credit Class 3 - Low)
All risk factors will normally be computed in the course of the analysis, but each may be skipped if there is insufficient heterogeniety of that risk factor to allow a meaningful analysis. The elements of the "core curve" will generally be constrained to be within a small tolerance range of the previous day's calculation, if such a calculation exists.
Successive attempts are made to find a best fit of the curve to the data; the curves are applied to the cash-flows developed in the computation of "Curve Yield" to determine a "curve mean price" (the average of the prices found by applying the curve to the "bid" and "ask" cash flows). If the Curve Mean Price is between the actual bid and offer price of the instrument, the variance is zero for that instrument; otherwise, the variance is considered to be the square of the difference between the Curve Mean Price and the closest price of the quotation pair.
Perturbations are applied iteratively to the candidate Yield Curve and continued until all relevent risk factors and core factors cannot be varied to improve the fit. Due to the deliberate tolerance for error implicit in accepting any derived price between the bid and the ask as giving rise to a variance of zero, solutions are not precisely unique; tests have found, however, that the final curve represents a global minimum variance.