treasury spot rate vs. yield on a treasury note

What, conceptually / definitionally, is the difference between the 18-month Treasury spot rate and the yield on a 1.5 year Treasury note? I would have thought they would be the same, but Schweser Study Notes book 5, page 129, Comprehensive Problems, Question 4 suggests otherwise.

Spot rate and Yield are different. Spot rates are caculated for zero coupon treasury and for treasuries that are not zero coupon, spot rates are calculated by bootstrapping. Remember spot rate is a theoratical rate to do arbitrage free valuation. On the other hand, yield on 1.5 yr treasury is BEY and it is calculated by finding the YTM and mutliplying it by 2.

First : Spot rate is the return on an investment that gives all cash flows at “one spot” in time. e.g. zero coupon bonds. Second : 1.5 year spot rate is the yield/return on a 1.5 year zero coupon bond. i.e. buy it at discount now and get the par value at maturity to earn “spot rate”. Third : 1.5 year treasury notes will give cash flows at end of six month(coupon), end of one year(coupon) and then at the end of one and half year(coupon+principle). Fourth : Return on 1.5 year treasury note represents a sort of average of three spot rates… i.e. 6 month, 12 months and 18 months spot rates.

^ nice And the average is this weird kinda thing where we find the rate that discounts the future cash flows so that the discounted future cash flows = market price. It’s not immediately clear that the yield is an average of those spot rates.

JoeyDVivre Wrote: ------------------------------------------------------- > ^ nice > > And the average is this weird kinda thing where we > find the rate that discounts the future cash flows > so that the discounted future cash flows = market > price. It’s not immediately clear that the yield > is an average of those spot rates. Agreed - very nice description. I describe the yield as a “time and money-weighted” average of the individual spots. It’s not exactly right, but I think it works as a useful methaphor. Just don’t ask me to prove it.

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