 # Treasury yield and spot rate

I am confused with these three concepts. Book is saying you can compute the spot rate from yield curve, but my question is why not just use yield curve. I don’t see any problem with using yield curve. What extra information does spot curve gives that yield curve doesn’t. I understand the need to compute forward rates, but not for spot rates.

You need boostrapping to get the real spot rate at which you discount a bonds cash flows. Bootstrapping takes the yield curve and then pulls out implied spots out of it. As long as you have one zero, you can bootstrap. It’s a tedious process on paper, but most banks have software/tech that does it for you. On the CFA, that is clearly not the case.

the importance of spot rates is that they can be used as discount rates in calculating PV of future cash flows

What exactly does it mean to say “bootstrapping takes the yield cure and pulls out implied spots out of it” Doesn’t yield curve give you the YTM, for a given maturity? if you know the YTM for a bond, then you know that’s the rate that has been used to discount the cash flows of bond. Still don’t understand what use is spot rate.

YTM is IRR of cash flows, very different from discount rates.

isn’t IRR the discount rate you are using to discount the cash flow of that bond?

IRR is the discount rate that makes NPV = 0. The assumption is that all cash flows are reinvested at that rate which is not realistic. Realistically discount rates depend on time. Discount rate of a cash flow 6 months from now is different from a cash flow in a year -> spot rates are necessary.

Mara, your explanation still doesn’t make sense. But like reading the text for 5 times, what I understand is cash flows from zero coupon bonds discounted at spot rates (should equal) === cash flows coupon bonds discounted at YTM. otherwise they’d exist arbitrage and hence, anyone who needs to see if there is an arbitrage needs to know spot rates, if you didn’t the spot rates you wouldn’t be able to exploit the arbitrage.

Spot rates are trying to incorporate the whole yield curve, vs. one point. If the spread on a 10yr corp bond is +200 basis points to the 10yr, it is not taking into account what is going on over the rest of the yield curve along the way. Am I thinking about this correctly? In the bond industry the z-spread is trying to take hold but we don’t use it much. Bond traders are too lazy I think. I have found the easiest way to find the forward rates is to set the CF at each time period using the spot rate and adding them up, is anyone else doing this? The equation is so tedious.

no, that is the whole pt – the YTM on the yield curve are not the “real” rates at which you discount a bond’s flows.