Bond Pricing and Spot and Forward Rates
As discussed in Chapter 1, there are two types of fixed-income securities: zero-coupon bonds, also known as discount bonds or strips, and coupon bonds. A zero-coupon bond makes a single payment on its maturity date, while a coupon bond makes interest payments at regular dates up to and including its maturity date. A coupon bond may be regarded as a set of strips, with the payment on each coupon date and at maturity being equivalent to a zero-coupon bond maturing on that date. This equivalence is not purely academic. Before the advent of the formal market in U.S. Treasury strips, a number of investment banks traded the cash flows of Treasury securities as separate zero-coupon securities.
The discussion ...

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