Spot Curve vs. Yield Curve

Can someone explain the difference between a yield curve and a spot curve? Thanks

The yield curve assumes coupons are reinvested at that rate. Spot rates are simply a zero-coupon rate at t=0.

MrE2All Wrote: ------------------------------------------------------- > The yield curve assumes coupons are reinvested at > that rate. Spot rates are simply a zero-coupon > rate at t=0. Is that what causes the divergence in present value when discounting the same cash flows back (using the coupon rate vs. the spot rate)?

To add to your question: Assume that maturity=n years.and YTM=Y So PV of bond=Cash flows(coupon payment till n) + Par(nth year),discounted at Y. Basically what we get is the standard formula for price of bond. whereas say the Spot YC for each year from t=o is S1,S2,S3…Sn. Then PV of bond =Each year coupon payment+Par(nth year) discounted at S1,S2…Sn at 1,2…n years respectively. Shouldn’t the Price be same by either of the two methods. If you are referring to Arbitrage free valuation,does that mean,the price of bond in the market is determined using YTM and then compared with price using spot YC could some one explain this please,I’m getting confused?

this is a good video, explains method of bootstrapping very well http://www.youtube.com/watch?v=Z37fgHS11Wc

jgrandits, Thanks a lot!that was really informative… So the bottom line is Bond price would be same regardless of the discount factor used,Spot or YTM. However individual cashflows would differ,and the pattern of YC for spot rate is more realistic rather than a Flat YC of YTM. Why using Spot rate is a more realistic. Since Discount rate=F(Maturity) so it cannot remain constant,whereas the assumption in case of YTM is the cashflows are reinvested at the same discount rate till maturity.