Hi guys,
I feel like mixing the Treasure Spot and the Yield curves. Could some please shed some light on the differences.
Thanks!
The treasury rate curve is spot rates for treasury bonds/notes of various maturities. The “yield curve” could refer to other rates, for instance swap rates, which are generally higher than treasury rates.
spot rate = rate for a zero coupon bond (basically for a loan with a balloon repayment). Yield (short for yield to maturity - is a complex combination of spot rates depending on the number of CFs on the bond). Both are generally used for treasury (but no rule to not use for other bonds).
Ok, I get it. So, yield is what I get from investment (any maturity) and spot rate is the zero coupon yield if I invest today. Thanks guys
when valuing a bond why can’t you just use each YTM along the yield curve, that is, why can’t you just plug in those yields with each respective cash flow (maturity) instead of using spot rates at each maturity? This may be a silly question, but what makes the spot rate/zero coupon bonds so much cleaner, for lack of a better term, when valuing bonds ? Does this mean we should never use YTM to value bonds ? If so, why do we use YTM to calculate the difference in the price when rates change? Perhaps its bc YTM is IRR and if you want to know how much the inc/decrease is then you would use YTM, correct? It just seems like we’ve used YTM to find the current price which we then use to determine the premium/discount. How does this hold up if we should be using spot rates to value the bond?
YTM assumes two things 1. The bond is held to maturity 2. interim cash flows are invested at the ytm that existed when investment was made .So there is reinvestment risk. i.e cash flows are invested at rates that may be different from the initial YTM Zero coupons bonds have zero reinvestment risk.The YTM of a Zero coupon bond is known as Spot Rate.since reinvestment risk is eliminated it provide a better measure of estimating bond price.
Price Coupon Yield 6-month T-bill NA NA 3.10% 1-year T-bill NA NA 3.06% 1.5 year T-note 100 3.00% 3.00% 2-year T-note 100-15 3.12% 2.88% Can we calculate the spot rates & foward rates given the information above? Please assist