It is often assumed that financial markets are frictionless. Bond markets are illiquid and bond prices are observed with errors. The magnitude of these errors leads to violation of no--arbitrage conditions and, consequently, prevents researchers from obtaining an estimate of the term structure...

This paper uncovers an implicit assumption, and its implications, made in the process of maximizing yield (or minimizing costs) subject to the duration constraints. Using linear programming results, it is shown that this technique is sensible only if the yield of a bond is a linear function of...