calculate from Yield Curve

You can create a spot curve by using the Treasury Yield Curve
A spot curve created in this way is called the Treasury Spot Curve or Spot Rate Treasury Curve.
Also known as Risk Free Zero Coupon Curve, Spot Rate Yield Curve, Implied Zero Coupon Curve
This curve shows the yield to maturity of zero-coupon treasury securities.


US Treasury STRIPS
The yields on coupon strips are by definition zero coupon rates.
on the run
coupon paying treasury bonds
Could use UK government bonds
If US Treasuries are used, the curve is often called the Treasury Spot Curve


This the relationship between the yield to maturity on a zero coupon bond and the bonds maturity date.
Only zero-coupon bonds have no reinvestment risk associated with them.
It is the reinvestment risk (or assumption) that makes this curve a better choice than the Yield to Maturity curve.
Zero-coupon yields are the key determinant of value in the capital markets and they are calculated and quoted for every major currency.
Zero coupon yields can be used to value any cash flow that occurs at a future date.


Constructing the Curve using Coupon Paying Bonds

How do we construct the zero-coupon yield curve from coupon paying bonds.
When we use zero coupon bonds to construct our Discount Curve, the curve is often called the Zero Rate Curve.
We can do this using a process called Bootstrapping
Lets suppose that we have the following US Treasury Bills and Notes
The chart shows these yields plotted against their maturity dates.


1 Year Spot Rate

We already know the 0.25 and 0.5 spot rates since these Treasury Bills are already zero-coupon bonds.
So lets calculate what the 1 year spot rate would be.
We can calculate this using a method called bootstrapping.


1.5 Year Spot Rate



The yield on a zero-coupon intrument is called the spot rate.
The zero-coupon yield curve is not an accurate indicator of average market yields because most bonds are not zero-coupon.


© 2025 Better Solutions Limited. All Rights Reserved. © 2025 Better Solutions Limited TopPrevNext