Zero coupon yield: Difference between revisions
imported>Doug Williamson (Note expressly that there is no intermediate interest.) |
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The rate of return on an investment today, for a single cashflow at maturity of the instrument. | The rate of return on an investment today, for a single cashflow at the final maturity of the instrument. No intermediate interest is payable or receivable. (There are no interest coupons, hence the name 'zero coupon'.) | ||
The zero coupon yield is equal to the current market rate of return on investments in zero coupon bonds of the same maturity. | |||
'''Example''' | <span style="color:#4B0082">'''Example: Cash flows from 3-period zero coupon instrument'''</span> | ||
The zero coupon yield for the maturity 0-3 periods is 2% per period. | The zero coupon yield for the maturity 0-3 periods is 2% per period. | ||
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The zero coupon | The zero coupon yield is also known as the Zero coupon rate, spot rate, or spot yield. | ||
'''Conversion''' | |||
If we know the zero coupon yield, we can calculate both the [[forward yield]] and the [[par yield]] for the same maturities and risk class. | |||
The conversion process and calculation stems from the '[[no-arbitrage]]' relationship between the related yield curves. | |||
This is illustrated on the page [[Converting from zero coupon rates]]. | |||
== See also == | == See also == | ||
* [[Bootstrap]] | * [[Bootstrap]] | ||
* [[Converting from zero coupon rates]] | |||
* [[Coupon]] | |||
* [[Falling yield curve]] | |||
* [[Flat yield curve]] | * [[Flat yield curve]] | ||
* [[Forward yield]] | * [[Forward yield]] | ||
* [[Negative yield curve]] | |||
* [[No arbitrage conditions]] | |||
* [[Par yield]] | * [[Par yield]] | ||
* [[Positive yield curve]] | |||
* [[Rising yield curve]] | |||
* [[Spot rate]] | * [[Spot rate]] | ||
* [[Yield curve]] | * [[Yield curve]] | ||
* [[Zero]] | * [[Zero]] | ||
* [[Zero coupon bond]] | * [[Zero coupon bond]] | ||
[[Category:Financial_management]] | |||
[[Category:Corporate_finance]] | |||
Latest revision as of 20:35, 1 July 2022
The rate of return on an investment today, for a single cashflow at the final maturity of the instrument. No intermediate interest is payable or receivable. (There are no interest coupons, hence the name 'zero coupon'.)
The zero coupon yield is equal to the current market rate of return on investments in zero coupon bonds of the same maturity.
Example: Cash flows from 3-period zero coupon instrument
The zero coupon yield for the maturity 0-3 periods is 2% per period.
This means that a deposit of £1,000,000 at Time 0 periods on these terms would return:
£1,000,000 x 1.023
= £1,061,208 at Time 3 periods.
(No intermediate interest is payable.)
An application of zero coupon yields is the pricing of zero coupon bonds.
The zero coupon yield is also known as the Zero coupon rate, spot rate, or spot yield.
Conversion
If we know the zero coupon yield, we can calculate both the forward yield and the par yield for the same maturities and risk class.
The conversion process and calculation stems from the 'no-arbitrage' relationship between the related yield curves.
This is illustrated on the page Converting from zero coupon rates.
