One test of our data and procedures is to see how well the spot rates
extracted from coupon bond prices explain those prices. We do this by directly
comparing actual prices with the model prices derived by discounting
coupon and principal payments at the estimated spot rates. Model price and
actual price can differ because of errors in the actual price and because
bonds within the same rating class, as defined by a rating agency, are not
homogenous. We calculate model prices for each bond in each rating category
every month using the spot yield curves estimated for that rating class
in that month. For each month, average error ~error is measured as actual
minus model price! and the square root of the average squared error are
calculated. These are then averaged over the full 10 years and separately for
the first and last 5 years for each rating category.